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The Definition of Ethics:
eth'ics (eth'iks) n. pl. (1) the principles of honor and morality. (2) accepted rules of conduct. (3)
the moral principles of an individual. ---eth'ic, adj. pertinent to morals.
The New American Webster Dictionary
Ethics is a derivative of the Greek words ethikos, meaning "moral" and ethos, meaning
"character." By textbook definition, ethics is "a branch of philosophy that deals with the values of
human life in a coherent, systematic and scientific manner." The Oxford English Dictionary
defines ethics as "the department of study concerned with the principles of human duty" and the
"rules of conduct recognized in certain associations or departments of human life." Webster's
Third International Dictionary defines ethics as "the discipline dealing with what is good and bad
or right and wrong or with moral duty and obligation."
Ethics is complex in many ways, but in other ways it is quite simple. Each person knows what
they perceive to be right and wrong. Each person has a personal code of ethics. Following their
personal code will generally conform to a large degree with what society expects of them.
Ethics involves the rules, values, standards and principles that guide our actions in day-to-day
Ethics involves the struggle of how to live one’s life, both personal and professional. Throughout
recorded history, this search has occupied the thoughts of many people. The study of ethics
involves one of the oldest systems of guiding human behavior, one that goes back to the very
beginnings of our civilization.
In the earliest days of mankind, human beings lived in small groups, first the family, and then
the clan or tribe. Over time, clans and tribes united to form larger units, either for protection or
for social and economic reasons. Once the larger unit existed, a division of responsibilities
occurred. Some responsibilities remained with the individual, while others, such as defense,
were taken over the group.
Leaders either won out over everyone else and ruled by force, or were chosen on some
mutually agreed upon plan. At the same time that some responsibilities were assumed by the
larger group, a code of behavior that ruled the behavior of all members of the group, came into
From the beginning of time, when humans began living together, ethics was a system of
unwritten rules that were necessary for survival. If the strong was allowed to take everything
from those who were weaker, survival within the society could not continue. These unwritten
rules were established so everyone would benefit from each other. These rules established the
way in which others were to be treated. Those that worked lasted - those that didn’t were
replaced by others.
There are two sides to ethics. One side defines improper conduct, things people should not do.
Ethical persons seek to avoid doing things such as lying, cheating, stealing, revealing
confidences, abusing others. The other side specifies what they should do. Ethical people strive
to be candid, fair, helpful, compassionate, and accountable. The individual committed to living a
more ethical life must be constantly aware of both the negative and positive dimensions of
ethics and try to live up to both.
LEVELS OF EMPHASIS
Ethics may be approached from at least two points of view:
• general moral standards that are age-old and reflected strongly in the teachings of all
religions through history; and
• high standards and moral judgments that must be maintained by those whose roles in
life involve the welfare of others. Insurance professionals certainly hold a position of
trust, both with their clients and the insurance companies they represent.
There are two areas an individual must emphasize in order to move toward a more ethicallybased
life. One area of emphasis is to cultivate ethical virtues such as honesty, truthfulness,
and faithfulness. The second area to emphasize is to become better at making ethical choices.
Ethical decision-making skills can help people more effectively eliminate improper options and
choose among conflicting ethical obligations. People interested in living an ethically-based life
should work at both developing ethical values and improving the choices they make.
Many of the decisions people make depend upon their personal ethical code. They are made
after a process, in which they weigh all the factors and decide whether or not, in this case, the
end justifies the means. Sometimes taking the most ethical path means people must give up
something else that is important to them. There is often a price to pay for leading an more
ethically-based life; fortunately, in the long run, the rewards are also greater.
The subject of ethics can also be studied on two levels:
• on the philosophical level-where careful reflection enables agents to avoid trouble while
increasing their personal efficiency as an insurance professional; and
• on the practical level-where a code of ethics helps agents gain personal and
professional satisfaction and also helps them avoid controversy and misunderstandings
with their insurers and clients.
Ethics are synonymous with an individual’s own personal behavioral code. Personal ethics are
things people make themselves do, no matter what, and things they will not allow themselves to
do, no matter what.
Setting down priorities determines goals in life. Ethics help people set goals that will bring about
pride in themselves and their achievements. Regardless of their personal circumstances, it is
always possible to have a moral code (a code of ethics). Even those in dire circumstances have
chosen to live their lives with a moral basis.
Some people will develop a personal code of behavior, and try to live by it most of the time,
while others either do not develop such a code, or abandon it when it gets in the way of what
they want to do.
Personal ethical codes come into being when people are very young and continue to develop as they grow
and mature. Personal ethics are different from, though they may reflect or include, the laws of
society or the regulations of a church. They normally have much more force in influencing and guiding
their decisions than religious rules or laws. When the chips are down, people who might ignore certain
laws or disobey the regulations of a church often stick to their own ethical code.
How Ethics is Learned
Some people feel that ethics cannot be taught; people are either ethical or they're not. To some
extent, this is true. However, all people have certain core beliefs and values, taught by their
elders and established early in their lives, that dictate how they respond to certain situations or
dilemmas. These values define who they are and what they believe in. The importance of
maintaining a group's traditional beliefs are so important that some groups of people formulate
their own written codes of ethics. In this way, the next generation is taught to value and respect
the importance of traditional beliefs, religious values, culture and language.
During our childhood, our values come from those closest to us-family, friends and teachers-but
they may change and shift as we grow older. In fact, people often adopt certain behaviors or
beliefs that are in conflict with their own personal values in order to belong to a particular group.
Every individual is a product of their past. In many ways, everyone has been affected by the
past and brings it into decisions they make today. Current attitudes have their basis in the past
and ethics are certainly a part of those attitudes. It is impossible to understand current ethical
considerations without having some understanding of the past.
Morality is about the way people live and they learn it over their entire lifetime. To think that a
person who is not ethical today will never be ethical is wrong and the person who is behaving
ethically today may not do so in the future. Even so, most ethical behavior is learned during
childhood and adolescence. That is why ethical parenting is so important in the outcome of
children's lives and of our society as a whole.
Children learn what they see and hear. They imitate the behavior they see, especially that of
the adults that are close to them, such as parents. As a result, parents who set good moral or
ethical examples are teaching their children to do the same. Unfortunately the reverse is also
true. In homes where prejudice, racism, sexism and other behaviors are practiced by the
parents, children are very likely to act in the same manner. In fact, researchers say that as
much as 80 – 90% of an individual’s ethics are developed by the time they enter school; and
well before they can read or write. Most of it comes from their parents, as well as other family
members, church or Sunday School, preschool and day care providers.
The more complex our society becomes, the more we need to educate the general population
about ethical behavior. In the past, ethical behavior was taught to children primarily by their
parents. Currently, with so many families needing two incomes in order to survive financially,
there isn't as much time to teach children ethics and parents are counting on them to learn it
Most people are loyal to their families above everything else; this same kind of loyalty is found in
groups that have taken the family's place. And the glue that binds families and other groups
together is their behavioral code -- the code that sets limits of behavior, rewards for observing
the limits, and penalties if they are broken or overlooked.
Because personal ethical codes come into being when people are very young, and because
ethics continue to develop as people grow and mature, they normally have much more force in
influencing and guiding their decisions than religious rules or laws.
Most people are told from early childhood that they should not cheat, steal, or hurt others.
However, it seems that almost every day we hear about dishonesty in the insurance industry.
Often an insurance company or insurance agent receives negative publicity as a result of bad
judgment or poor ethical conduct. Because bad news usually attracts far more attention than
good news, a lack of attention is paid to ethical insurance professionals who are the majority of
Personal ethics are learned from parents, teachers, friends, and coworkers. It is an
accumulation not only of what they learn, but also of what they failed to learn. Individuals also
learn ethical behavior as a result of their life experiences. A dramatic or tragic occurrence often
teaches the fundamentals of ethics or moral behavior.
Moral or ethical conduct is continually learned and refreshed. It is doubtful that any person is all
good or all bad. People continue to learn as new ideas are presented and new experiences
encountered. Unfortunately, those who have been poorly educated on ethical conduct might be
faced with unlearning bad conduct as well.
One of the first lessons taught to children by their parents is sharing. Sharing is the opposite of
greed. The shift from securing our own interests to sacrificing on behalf of others is an essential
part of ethical decision making. This may come into play especially for insurance agents. The
choice to make a sale and earn a commission rather than sacrificing the sale on behalf of
honesty is an ethical decision. The selfish person cannot or will not routinely make such moral
decisions in an ethical way.
The Components of an Ethical System
Personal and professional ethics come from an understanding and commitment to a particular
set of values.
• Ethics involves questioning why certain things are done or thought.
• Ethics is a branch of study that focuses on the values of human life, duty, and morality
and presents rules of conduct.
• Ethics comprises standards of conduct that indicate how one should behave, based on
moral obligation. It deals with the ability to distinguish right from wrong, good from evil,
and propriety from impropriety and the commitment to do what is right, good and proper.
• Ethics is an individual responsibility and opportunity.
• Ethical decision-making skills can help people more effectively eliminate improper
options and choose among conflicting ethical obligations.
• People act ethically out of concern for others rather than themselves.
• Most people want to be ethical. They want to be worthy of the respect and admiration of
others and they want to be proud of their professions and what they do for a living.
Ethics is concerned with the values, principles, rules, standards and norms of a given society,
organization or group of people. Ethics is about making moral choices and the values that lie
behind those choices. It influences actions and affects decisions about what people ought to
do, and how they should live.
There are several important building blocks of a society’s ethical system. Together the following
items shape how a majority of people in a society think and behave:
• Rules and standards
Values are beliefs that relate to the concept of the worth of things and people which strongly
influence their actions. A value is something that people wish to maximize. People will be
motivated to accomplish actions that appear to them to increase the things that they value.
• Values are what people believe in, what they believe is important.
• Ethics is what people do.
Human beings have values that influence who they are, what they stand for and by what
guidelines they live. Values are ideals that affect a person's decisions about which principles or
qualities are most worthwhile.
Many people do not realize the connection between values and ethics. They live each day
without recognizing the cumulative impact of their individual actions. Leading an ethical life
requires that people establish their values carefully and then work every day to live up to those
Moral principles are guidelines that move people to conduct themselves ethically. They are
intentionally general in nature so they may apply to every situation individuals are likely to
encounter. From a general guideline individuals can work out the specific rules for ethical
The ways that societies prescribe for how their members should interact with one another and
with outsiders reflect the values of those societies. The principal method of controlling the
conduct of citizens is by imposing laws, usually from the perspective of what not to do, rather
than what to do. Laws prohibit certain actions and set the minimum standards society will
Rules and Standards
Rules are another way a society seeks to control behavior. Rules may be either negative or
positive, dictating what people must do or not do to accomplish a particular result. Standards
are typically positive and describe the minimum level of conduct that people find acceptable, for
themselves and others with whom they interact. Rules and standards don’t reach the formal
level of laws but they have incredible power to affect the ways in which individuals act.
Norms are actions that reflect the way a group generally behaves in a particular situation.
Norms typically possess an even stronger persuasive power to affect behavior than laws, rules
or written standards. The reason for this lies in the individual’s desire to be accepted by, and
belong to, the group -- often called “peer pressure”. The level of norms are generally higher than
laws or rules.
Ethics and Practicality
There are practical reasons for a person to choose to be moral and ethical. Some people would
argue that today's fast-paced, competitive society prevents people from being ethical all the
time. For example, every insurance agent faces vigorous competition from other agents when
soliciting, servicing and renewing accounts. From time to time most agents feel compelled, in
the interest of their, clients, insurers or themselves, to practice some form of deception when
negotiating with clients or their own insurance companies. They may feel pressured to make
conscious misstatements, conceal pertinent facts or exaggerate a situation to persuade clients
to purchase insurance coverage. Insurance agents can reconcile the need to make a sale to
earn their income with their own personal sense of ethics.
Ethics is not incompatible with business success; after all, most businesses are formed as
profit-seeking organizations and "profit' is a good thing. In fact, in the long run, good ethics is
good business since clients prefer to work with an ethical insurance agent, someone they can
trust. Trust is built on ethical behavior.
Acting ethically does not mean someone should step aside and allow a less ethical agent to
make the sale. A recent study suggested that ethical people are generally more successful than
unethical people. When people find a businessperson who has high ethical standards, they
tend to do more business with that person.
People are often told to follow their conscience, but they often do not do so. There are many
reasons why people do not follow their conscience. Perhaps the most obvious reason is a lack
of personal control. When it seems unlikely that any punishment or embarrassment will result,
many people simply do not have enough self discipline to do what they know is right. Many
people ignore their conscience because of outside influences such as loyalty, friendship and the
desire to fit in with the group. That is why it can be very important to carefully choose where
they work and who they associate with.
Lack of involvement is a common complaint. Bystanders have no moral commitment to risk
their lives to rescue someone else, especially a stranger. Fear and moral conflict often tend to
paralyze people into doing nothing. In addition, most people try to avoid anything that might
embarrass them or make them look weak or unattractive.
People who step forward and act possess moral certainty. They strongly believe in their views
and act upon those views, even when it is not popular. It does not necessarily mean that they
are right in their views, but they are certain personally that their views are correct. Two
separate studies have shown that a strict religious upbringing substantially contributes to a
person's moral certainty. This may be because there is no ambiguity about what is right or
wrong. There are straightforward definitions of right and wrong; good and bad.
The topic of ethics is a complicated and complex issue. Basically, however, ethics is simply a
matter of doing what we perceive to be right. Acting ethically is not a difficult thing, but it can be
a struggle. People and businesses do not act ethically for multiple reasons ranging from simple
laziness to indifference to ignorance. All too often greed is also an element.
Ethical actions do make sense. As long as people need other people for aid, comfort and
ordinary necessities, it is simply practical to treat each other ethically. While there are always
exceptions, in general, people tend to return the same kind of treatment that they receive.
Treating others in the manner they wish to be treated simply means that they will receive better
There are no clear or easy answers to many of the moral dilemmas in life. Most ethical choices
are not complicated. Insurance agents know what is legal and what is not. They know if they
have lied or been truthful. Ethical behavior is something that they clearly do have control over.
Being ethical simply means doing the right thing. It may not be the easiest thing. Each day
brings multiple opportunities for behaving ethically or unethically. Often the choices are clouded
by temptations to better themself at someone else's expense. This means overcoming greed,
laziness, indifference, temptation and perhaps even fear. People all come face to face with
temptations. The truly committed ethical or moral person will have personal convictions by
which they live. These convictions didn't happen by accident.
Agents who have high standards of honesty and personal integrity may be unable to
compromise them, even if their agency or client asks them to do so.
It is easy to be moral and ethical when it makes people look good or noble. It is easy to behave
ethically when others will be observing them. The difficult part comes when there will be no
recognition for their convictions, when they may even be unpopular or have to confront another
who is acting illegally or unethically.
Beliefs and Values
Beliefs are those convictions or sentiments that people assume to be true. A belief system is
formed by a person's interpretation of and response to various life experiences. People's beliefs
influence their choices, their decisions and their life directions. Eventually beliefs become
synonymous with facts in their minds.
A person chooses his or her beliefs and values in a number of ways. When people are very
young, they tend to take the word of someone in authority (a parent, a teacher, a friend) that
something is "good," "bad," “right," "wrong," etc. As people grow older, they also rely on logic,
their own senses, emotions and intuition. By choosing to rely on authority, personal
observation and so forth, people create their own value systems or personal codes of ethics that
older, they develop their own powerful belief systems and values that may or may not reflect
their parents' beliefs and values.
The most obvious reason for avoiding unethical behavior is not fear of punishment; it is that
personal and professional success are determined in large part by beliefs, values, character and
ethics. Being ethical isn't a question of just knowing what's right or wrong; it's a matter of doing
what's right and avoiding what’s wrong.
Unquestionably, honesty is an ethical pillar of insurance. It may be the most important one. For
insurance to be available and used over the long run, honesty must generally be regarded as
good and must characterize behavior.
Insurance viability in the long run requires that the number of insured losses suffered by the
insured group in any one period be small relative to the total number of exposure units in the
group. Otherwise, the premiums required to cover the losses become larger than a sufficient
number of insureds will be willing to pay. In such eventuality insurers are forced by insolvency
or prudence to withdraw from the market.
Dishonesty leads to an increase in the number and average size of insured losses. Insurance is
essentially a fragile mechanism highly vulnerable to cheating not only by claimants but also by
virtually anyone else in a position to influence the insurance transactions. The insuring
mechanism is delicate and highly vulnerable to abuse.
Honesty is a cornerstone of ethical behavior. Someone who is honest takes care not to deceive
others, either by what they say or what they fail to say.
Honesty also means making sure others receive what they are entitled to and not accepting
things to which one is not entitled. Clients pay for an objective evaluation of their insurance
needs and an objective recommendation about what will best meet their needs, and for ongoing
service to assure that their needs are continually met, and they should get nothing less.
Being honest is essential to creating the kind of trust in the agent-client relationship that allows
consumers to make an affirmative buying decision. Consumers aren't going to buy insurance
from an agent they think has been dishonest with them, nor will they refer that agent to other
people they know. At the same time, consumers are eager to work with agents whom they
know have made a competent evaluation of their insurance needs and an objective
recommendation regarding how they should meet those needs. In addition, agents who handle
themselves in an honest and professional manner have no trouble obtaining referrals to other
high quality prospects.
Honesty requires the ethical use of language, facts and statistics in advertising, sales literature,
and other business communications with prospects and clients, including presentations and
recommendations. It is never ethical to use fear, guilt and other negative emotions to try to
motivate a prospect or client.
Honesty also means that sales professionals do not mislead their prospects, clients, employers
or business associates. Instead, ethical sales professionals clearly identify – very early in the
sales approach – who they are, what companies they represent, their purpose for meeting with
individuals, and what products and services they sell. When making recommendations to
clients, sales professionals demonstrate their honesty by using presentations and illustrations
that are easy to understand, and explaining the associated risks, benefits and assumptions so
that clients can make an informed decision.
Human beings have the power to choose to be good or evil, to be generous or self-centered, to
be immoral or ethical. Honesty is the basis of ethics and relates to a person's integrity and
truthfulness. Most individuals, when less than honest, suffer some guilt or responsibility for the
Ethics involves the questioning of why certain things are done or thought. Most of the issues
that people are faced with are related to one issue: what is the right thing to do? This simple
question often has multiple answers.
Many people believe "Honesty is the best policy." In fact, in some situations, ethics might
actually defy this. For example, people who hid Jews during the holocost in Europe lied about
hiding them. Certainly, in this case, honesty would not have been the best policy. Ethics
involves individual perceptions and point of view. Those who were hunting the Jews would have
considered hiding them wrong and unethical. On the other hand, the people who were seeking
to save the Jews held the opposite view.
The Individual and Society
Even very moral and ethical people may disagree on moral issues. Some believe that "right is
right, at all times and in all places" whereas others believe that moral truth is relative to culture,
personal ideals and legal aspects. Even one's economic situation can have a bearing on their
perception of what is ethical.
Individuals tend to feel strongly that their interpretation of "ethical" or "moral" is right and others
are wrong. Yet, when it comes to ethical behavior, there certainly are areas that vary greatly
with neither side being either totally right or wrong. Some also believe that the end justifies the
Some types of ethics tend to be universal, meaning that they apply to all people in all countries.
Sometimes however, people or cultures do not agree on what is ethical behavior. What one
culture or society may consider ethical another may not. Even within the same culture or
society, people may disagree on what is and is not ethical. These differences often exist
between religions as well.
Since ethical behavior may not be the same everywhere or even from culture to culture in the
same country, we must mandate certain behavior when cultures do not conform to what the
majority of our citizens desire. What one individual feels is obviously "right" may not appear so
to another. Ethical standards, which are enforced by social pressure make no attempt to
actually determine what is right or wrong morally. They simply define what is right or wrong
according to the given culture. There is the tendency in any group of people to consider their
best interests to be right. That which is contrary to their best interests is often considered
Each country has a set of ethics that are unique to the people in it, some of which are common
with ethics of people in other countries. Americans have many opinions as to what is believed
to be ethical because of the varied population with a varied background. A work ethic was
easily accepted by the immigrants who came to America. Many of these immigrants had never
before had the opportunity to obtain successor possessions through personal work.
In the United States, the predominant early society was based on Puritanism, a creed that
highlighted self-restraint, control and a dedication to a higher ideal than self. Puritanism meant
community, a strong sense of law and order, and a stern and demanding code of ethics. In
essence, Puritanism provided a set of guidelines about how to deal daily with a group and a
How To Define Success
Many people are more concerned with how they live their lives than they are about how they
can acquire material goods. Unfortunately, these values are not always rewarded by society.
Even good people will be tempted when in certain situations. How people react to temptation
says a great deal about who they are ethically.
Ethics sometimes requires tough choices. Sticking to one's ethical convictions often means
traveling a rougher road. Choices between right and wrong are not always easy to identify.
Individuals must make what they perceive to be the best choice. Businesses must follow ethical
guidelines even if it means a lost sale with lucrative potential.
In the United States and many other countries, success is usually measured by wealth.
Unfortunately, society has become used to hearing about businesspeople who have earned
their wealth through unethical, questionable or illegal activities. To many people, the term
"business ethics" is an oxymoron. Unfortunately, society isn't always critical of wrongdoing and
tends to accept that business is inherently corrupt. In fact, many people feel that the only way
to succeed in business is by cheating clients and competitors.
This tendency to emphasize personal financial gain is a common way many businesses
including those in the insurance industry motivate their employees. Financial gain is often held
out as the primary measure of success. This is not to say that pursuit of financial gain is wrong;
however, incentives have the tendency to spotlight financial achievement while ignoring
professionalism and ethics.
Human beings, like all other animals, are born with primary survival instincts, such as the desire
to obtain food, shelter and safety, which develop long before they think about ethical behavior.
Self-interest and self-preservation are the driving forces within human beings. Without these
instincts human behavior is often directionless, chaotic and selfdestructive. Certainly, agents
should expect to be adequately rewarded for success, however, the agent should remember
that his or her own rewards must not be earned at the expense of the insurer, clients or general
The ideal path for the ethical insurance agent is to follow his or her own conscience. The ability
to see one's own face in the mirror each morning and be able to stare back at it without shame
or embarrassment is priceless. In our modern society it may be difficult for many individuals to
live in an absolutely ethical manner, but they should always strive for it.
Often times, people do not act ethically because they want to meet other goals. For example:
• To meet needs of immediate self-interest
• To gain certain short-term benefits
• To protect someone
• To avoid punishment
• To win admiration or interest of others
• To avoid embarrassment
• To maintain privacy
• To avoid certain harm
To make themselves more comfortable with their actions, people often revert to rationalizations
such as the following:
• "If it is legal, it must be O.K."
• "I was just trying to help them."
• "Everyone else does it."
• "If it doesn't hurt anyone, it's O.K."
• "Business is business."
Rationalizations make it easier to live with themselves when they do the things they want to do,
rather than those things they know they should be doing.
ETHICS IN MODERN SOCIETY
In America, saving money and living frugally, the way their parents or grandparents were raised,
is no longer valued. Often living for today is seen as more important than financial stability in the
future. This is a very common view in today’s society. Many people would rather have
something now than wait until later. Many people do not look beyond the present time to what
the future holds for them.
In today's society, people don’t have to look far for examples of an increasing emphasis on the
ethical aspects of an issue. Some people feel the moral and ethical fiber of society is
deteriorating rapidly. Most people agree on the importance of maintaining a high ethical
standard for a society to survive and prosper.
Enron, WorldCom, Arthur Andersen are examples of corporate greed and an utter disregard for
the principles of fairness and ethical practices. Although they have become well known for their
significant ethical and legal lapses, these companies are not unique.
Many feel that it is even more important to maintain a high ethical standard in the insurance
industry. The unique aspects of the insurance industry demand such a high ethical standard.
Both individuals and businesses depend on insurance to provide essential services and to
protect them from financial disaster. Health insurance provides access to quality medical care.
Life insurance proceeds support families, educate children, and assist in the perpetuation of a
business. Property coverage is an integral part of every mortgage contract. Casualty contracts
such as automobile and workers' compensation are often required by law. In modern society,
insurance has become a necessity.
Ethics are never a separate part of life. They are part of everything people do and everything
they say. Ethics determine how we treat those we know and how we treat strangers. Ethics
determine our actions in financial and public matters. Ethics belong in every profession and are
especially important in some, including insurance. Agents must understand that their peers,
their company, their prospects and clients all rely on them to make the right choice every time.
Religion & Ethics
Ethical people often have some form of religion in their lives. Early Americans held their
religious freedom to be highly important. Such values often define the criteria upon which
important ethical decisions are made.
Many Americans at least partially arrive at their code of ethics through their religion. In fact, the
Bible and other religious texts include many rules for ethical behavior. Religious doctrines are
probably the best known source of sound ethical advice.
Many religious philosophers have argued that ethics cannot exist without religion. Traditionally
the link between religion and ethics provides a reason for doing what is right: Those who are
moral in this life will be rewarded with eternal happiness; those who are immoral will be
condemned to eternal damnation. This reward/punishment system of religion contributes to
Some types of ethical or moral questions can be directed to religious institutions for support in
determining the right answer. Sometimes the answers can be found in the legal system. If the
state or federal government says something is illegal it usually is unethical as well. Sometimes,
determining what is ethical is simply a matter of what feels right emotionally.
LAWS VERSUS ETHICS
Laws tell people what they must do; personal values and ethics, as defined by what they do, tell
others what they believe in and who they are.
Sometimes ethics are written standards; sometimes they are merely understood. Often ethics,
which have previously been "understood", become written laws when individuals do not follow
preferred practices voluntarily. At that point, pressure from society makes these "rules" into
written laws and mandates that they be officially enforced.
For example, when Medicare was first introduced, there were relatively few rules or regulations
on the design of Medicare supplemental insurance policies. As abuses mounted, standards
were implemented because the need for them brought about pressure from society.
In a society where rules and regulations seem to grow daily, some people feel simply that if it is
legal that’s good enough. For these individuals, as long as they are not breaking the law, any
behavior is deemed acceptable. Many salespeople do not realize that simply following the laws
is the minimum acceptable level of ethical conduct. It is up to the business organization to set
the actual ethical code of conduct that they require. Ideally, that will be higher than is actually
mandated by law. Of course, each individual must also set their own personal standards of
An insurance producer's ethical responsibilities to the state in which he or she is licensed are
set forth in statutes and regulations. Essentially, each state creates a code of ethics by defining
and codifying what is not legal and not ethical. At a minimum, ethical behavior requires that
insurance or financial services professionals have to conduct business in accordance with state
and federal laws. However, it is wise not to confuse laws with ethics.
While laws set the minimum standard by which producers are expected to behave, a person's
personal values or ethics provide a guidance system to help him or her choose the right answer
or alternative to ethical dilemmas when several choices are available.
A wise insurance agent will certainly follow state and federal regulations, but ethics goes
beyond what is simply mandated by state or federal authorities. Ethics define who we are. A
person, in any line of work, must realize that their daily actions or inactions defines who they
Society is based on the law and the legal obligations dictate the minimum requirements
necessary to keep people out of the justice system. Many people equate ethical behavior with
legal behavior. There are many situations which may be legal, but are not necessarily ethical.
On the other hand, it is far more challenging to come up with situations which are ethical, but
In most cases, people can assume that if something is illegal, it is also unethical. Because legal
obligations are the absolute minimum, one should take the next step and determine if action
being considered is an ethical one. It is possible for something to be ethical, but not legal.
Legal authorities may be able to mandate behavior, but not ethics. A person who would like to
steal may not do so because of the negative consequences such behavior would bring about.
Therefore, his behavior is controlled, but his ethics are not.
Controlling a person's behavior may, however, eventually lead them to an understanding of
ethical behavior. It is not unusual for an individual to become the person they pretend to be. A
person who acts ethically, even if they are made to, may eventually adopt ethical behavior.
An insurance agent who is unethical will quickly earn a reputation as such. From the legal
standpoint, unethical behavior may also mean legal action against an insurance agent, their
agency and the insurance company.
Ethical considerations go beyond the strict requirements of the law. While breaking the law is
certainly unethical, there is much more to being ethical than simply staying within the law. The
law does not provide a complete guide to ethical behavior. And to be successful, people must
be ethical. Insurance is a business based on trust, and people simply will not do business with
an agent that they know or even suspect is unethical. Agents must strive to be ethical in every
way, and they will be rewarded with loyal customers who purchase from them time and again
over the years and refer them to many others who will do the same.
Ethics is right for right's sake while the law represents a set of minimum standards that society
demands for its survival.
Some people feel that if it's legal, it must be moral. While laws are intended to have a strong
connection to morality, that this is not always the case. Ethics usually precedes the law. While
many ethical standards of conduct have been codified, many have not. Ethics goes beyond the
letter of the law and entails not only what someone must do but also what they should do.
Ethics is Hard Work
Most people agree that toughness is necessary in the business world. Ethics is often perceived
as not being compatible with toughness. Actually, it requires extreme toughness for people to
be able to stand up for their ethical values while peers and competitors are constantly pulling
and pushing them in various directions.
Toughness is also necessary to succeed in sales. An insurance salesperson that cannot take
repeated rejection will not last in the insurance industry as a salesperson. Toughness that is
coupled with a code of high ethics promotes productivity and efficiency, along with the spirit of
competition, all of which contributes to economic success.
Ethics is hard work because being unethical can often be more financially rewarding. People
become followers instead of leaders. It is easy for the individual to simply go along with the
group, even when a person knows something is not right, but no one else is saying anything.
People should do what is right all of the time, no matter what others are doing or thinking.
Though this is good advice, it is sometimes easier to say it than to do it.
Being an ethical person is hard work. Most people must make a continuous effort daily to
maintain ethical behavior. Those who view ethics to be a top priority in all aspect of their lives
also value others who are ethical. Honesty and caring for others are an important part of
Top-notch salespeople tend to "go the extra mile" for their clients, even when it does not bring
them any immediate financial rewards.
Courtesy is an expression of respect. It is not linked to income, background, or schooling.
Those who practice courtesy simply wish to make others feel comfortable. It is very common for
the most courteous of people to also be among the most ethical.
Ethics and Character
Realistically, people are shaped by what they do. Not only are people defined by the things they
do, they are also defined by the things they do not do. Who they are evolves over time. Though
at times people are shaped by one life-changing experience, for most people their character is
steadily changing and evolving over time.
Often there are things that occur that are outside of their control, how they respond reveals
much about who they are.
Who people are is formed by two basic aspects: their thoughts and their actions. To be an
ethical person, agents must not only think ethically but must also act in this manner.
Character is who someone is and what they want to be.The decisions people make form their
character, which in turn influences their choices. Their actions today impact what they will be
Those who lie, cheat or steal, even in small amounts will become desensitized to more serious
acts such as perjury, unfaithfulness, and embezzlement. Conversely, when they choose to be
honest, to tell the truth, or not to steal, they take a step toward building a stronger character.
Ethics is not just a matter of how people think and act, but also a matter of their character. Many
factors come together to form a person’s character and they must all be taken into
consideration. Culture, background, values, morals, passions, and many other factors all
contribute to shape who they are. Character is also defined as the combined principles, values,
and beliefs of a person.
Everyone has the power to shape and change their character - for better or worse. Character is
also built upon their own code of ethics. The many actions and decision made each and every
day shape who people are.
Ethical decisions are made everyday in the workplace. These decisions will affect the quality of
work performed, employment opportunities, safety of workers and products, advertising, and
simple day-to-day operations.
Whatever action a person does or doesn’t take is a direct reflection of their character. Character
is defined as “the combined moral or ethical structure of a particular person.”
Ultimately insurance professionals are judged by what they stand for, their values, priorities,
ethics and their character.
No one gets anywhere in the insurance business without personal integrity. Those who lack
integrity don’t last very long in the business. Producers who are involved in illegal schemes or
who accept kickbacks as part of writing business do so because they opt for temporary success;
it provides them with instant gratification. Their focus on achieving short-term goals at the
expense of their personal ethics fails to provide long successful insurance careers.
Knowledge, skill and circumstances do not control long-term success as much as who the
person is, what he or she stands for and what guides the person. Because confidential
information from the insured is usually required in order to provide the needed insurance
protection, the agent's or broker's relationship with the insured is similar to the confidential
relationship between an individual and his or her physician, lawyer or accountant. The prospect
or client must believe that the agent or broker can be trusted with that confidential information.
There is little doubt that all persons are influenced by others, however for the ethical path
chosen, each person has the ability to build, change, or destroy their own character.
A good person can do something unkind, yet still be a good person. A bad person can do
something kind for another and yet remain basically an bad person. These isolated deeds are
referred to as being "out of character."
Even though it may not always seem to be so, there is an obvious connection between business
and ethics. In the short run, lying, fraud, deception and theft may lead to greater profits than
honesty and truthfulness.
ETHICAL DECISION MAKING
Ethics and values play an important role in the decisions that are made every day. The
decisions that are made, with or without ethical considerations, have a profound effect on our
own lives and those of others, including our clients. A background of ethics or values form the
foundation of our decisions.
Whether at work or in the home, all individuals face ethical issues on a daily basis. Generally
ethics is viewed as what is right and what is wrong. However, what defines right and wrong is
not the same for all individuals.
Many professions base their business decisions on what is best for their customers. Others use
financial aspects when making a decision. But every profession uses ethics for the foundation
on which the decisions are made.
Many people use experiences from their past to help them make "ethical" decisions. Someone
who has formed a strong ethical nucleus in early life will continue using that base in making
decisions everyday, most without even knowing it.
Ethical Sales Decisions
Insurance agents face difficult ethical questions everyday, many of which have no right or wrong
answer. In answering many ethical questions it is important for one to remember that each and
every situation is different. The agent has a duty to both the insurance agency and the client.
The agent must be honest with the company, giving them all necessary information, but they
must also keep their promise to their client.
Ethics must be a part of each and every sale. There simply is no reason not to act ethically.
Often, ethical behavior is actually a successful sales technique. For the sales professional
dealing with a client, ethical decisions are those that most successfully integrate the many
social, health and financial factors that make up the client’s immediate environment, in a
• Respects the rights and sensibilities of the client as an individual
• Achieves a result that is in the client’s best interest
The professional must consider every aspect of a recommendation and its possible and
probable effects on the client, and those who will be directly or indirectly affected by it.
Furthermore, the client must be given full disclosure of all the material facts that bear on his or
her making an informed decision. Those facts include the effects on the client and others of
implementing the recommendation.
Ethical decision making is a process of asking several important questions about the situation in
which people are involved. As with any difficult decision, these questions require the agent or
broker to think broadly about the implications of his or her actions. In each situation, the
producer should consider the following four questions:
• To whom do I have obligations and what are these obligations?
• Who has rights that must be protected?
• What moral rules apply to this situation and should be upheld?
• Would I be proud of my decision and publicly advocate this action?
Taking responsibility for their thoughts, values and actions gives people tremendous freedom in
the choices they make. People who feel that they do not have free choice, also feel they are not
responsible for their actions. Responsibility, is key in maintaining ethical behavior, because it
means they have no one else to blame for their failures and mistakes.
Individuals have the freedom to chose how they behave on a daily basis. With freedom and
assuming responsibility, comes a feeling of control over their lives.
Every professional should conduct his or her professional services in a way that could be
expected to improve their client’s situation. Improvement, of course, is specific to the individual
services provided, and can result in many forms. For the insurance and financial services
professional, it could mean that risk is transferred, that income is increased or taxation is
Additionally, the benefits the client receives are consistent with the professional’s respect of the
client. The professional needs to respect the client’s mindset, explain the consequences of
choosing not to purchase the product (documenting the client’s file as appropriate) and then
move on to other possible alternatives, other issues and different products. An attempt to
disguise the true nature of a product to sell it to an unsuspecting prospect is unethical,
regardless of the seller’s motives or the prospect’s need for the product.
A high level of professional ethics may sometimes cause a professional to avoid certain actions
and to forgo an opportunity for business growth and compensation. It is not always possible to
maximize short-term growth or compensation while adhering to ethical business practices.
Long-term professional growth and increased income, however, normally go hand-in-hand with
a high level of professional ethics—assuming that the professional has all of the other qualities
and credentials that lead to professional success.
Deciding What Is Ethical
Ethical decision making is a process of evaluating and choosing among alternatives. The goal is
to eliminate unethical options and select the best ethical alternative. To consistently make
ethical decisions, one must accomplish two, fundamental things:
• Evaluate alternative courses of conduct on ethical principles.
• Choose the action that best advances those principles.
Determining whether a company is ethical can be very challenging but well worth the time
invested. Taking the time to learn whether a company has the same core values as our own
helps us gain confidence in the company, the product they sell and the service they provide.
This is true whether researching a company as a possible employer or for personal investing.
REQUIREMENTS OF PROFESSIONAL ETHICS
Many people in the insurance industry have made a personal commitment to professionalism.
While defining professionalism is difficult, everyone agrees that a high ethical standard is an
integral part of it. In order to live a more ethical life and develop a more ethically-based career
experts agree there are three fundamental elements:
This is the desire to do the right thing and a commitment to make it happen. Everyone should
work at strengthening their commitment to lead an ethically-based life. There is often a price to
pay for doing the right thing, especially in the short run. Leading an ethical life style requires a
strong commitment to doing the right thing.
Also required is a sensitivity, an awareness of the ethical implications of situations. This can be
developed and intensified over a period of time. Developing this sensitivity increases our ability
to recognize opportunities to take the ethical path.
The third element for a more ethical life is ethical competency. Agents must have some basic
rules of practical business ethics that can be used in making difficult decisions.
What a person does is a better indication of who they are than what they say. Actions speak
louder than words. Clients want agents to follow through with promises to act on what they say
they will do.
Choosing to be an ethical person says that people value, not only those around them, but
themselves as well. Ethical laws, rules and authority - whether imposed on them from the
outside or from within, provide important boundaries that help them grow.
A PERSONAL CODE OF ETHICS
Ethics are synonymous with a person’s own personal behavioral code. Everyone has a code of ethics, even
if they do not realize it. Their code is what makes them take one choice over another.
The most important factor for an individual agent in dealing with ethical challenges is his or her
own personal moral values and standards. The person looking back at them in the mirror is the
best judge of what should be done in a given ethical situation. Family and friends can provide
support and insight to help resolve ethical conflicts, as can the agency manager or principal, but
it is still the individual agent, using his or her standards of proper ethical behavior, who must
respond to the ethical challenge.
If an individual does not know changes needs to be made, they won't change. Unless they
change what needs to be changed, mistakes will continue to be made.
An ethical person is happy about the success of others and doesn't feel envy or jealousy.
Simply letting someone know they did an outstanding job can have huge benefits.
Personal integrity and confidence are very important and everyone would prefer to deal with
people who know what they are doing and believe in themselves. People with high self-esteem
and self-worth feel good about themselves. These qualities help build client relationships in
business. People want to buy insurance from someone who feels confident about what they are
doing. Self-esteem and self-worth are very important in all aspects of life, though unfortunately
without knowledge and hard work they alone do not guarantee success.
Most ethical people don't deem themselves better than other people. Ethical people treat others
with a sense that they are valued and respected. This promotes honest communications and
strengthens relationships with clients and peers. No one likes being around someone who looks
down on them or doesn’t respect them.
Respect and politeness are part of ethical behavior. Courtesy is a trait that is intentionally
developed. Words, like "please" and "thank you" can make routine tasks more pleasant. Many
agents and managers do not realize the importance and power of these simple words. Often in
the end, the manager does not get the desired results from their employees because of the lack
of common courtesy that most of us take for granted.
Communication is key in all types of professions. Often a simple misunderstanding grows into a
huge problem which can cause distrust between people and seriously damage relationships. It
is important to work on communication skills and place high priority on communicating with
clients, coworkers, and all others we have contact with.
When personal and professional value systems conflict, one can experience a great deal of
inner conflict and stress. People who set high personal and professional goals of honesty,
integrity, loyalty, fairness, compassion, dependability, obedience to the law and truthfulness
tend to experience more inner conflict than those who choose a lower path. They must find a
way to achieve success at work without compromising their personal and professional values.
One way to do this is to adhere to a strict code of professional ethics.
If a sale can't be made with honesty, fairness and objectivity, it must not be made at all. An
opportunity for personal gain, that comes at the expense of another must be ignored. The
• Learns very early the difference between right and wrong in business and sales practices
and acts accordingly. He or she develops high ethical standards through training with
experienced professionals and association with industry groups.
• Consistently adheres to his or her values and maintains this integrity throughout his or her
sales career. The ethical agent resists conflicts of interest-real or perceived-in all business
dealings. Ethics emphasize the interests of clients and company over one's own interests.
• Willingly assumes the obligation to perform his or her duties in a way that reflects the
highest degree of dignity on the industry and best serves the interests of the client or
prospect. Occasionally, this means that the agent must put service above sales.
What is their attitude toward the insurance business? How do they feel about their clients?
Their agency? Their company? Their competition? All of these feelings create their general
attitude toward others. Those who feel a sense of service toward their clients, company and
business are likely putting someone else's interests ahead of their own. They set aside their
own interests and concentrate on doing what has to be done to help their client or prospect.
While many questionable practices can be condemned as being immoral or unethical, perhaps
the root of the problem is a lack of knowledge or understanding on the agent's part. The agent
who misrepresents a policy may not recognize that what he or she is doing is unethical.
STANDARDS OF ETHICAL BEHAVIOR
When people find themselves in a position that is contrary to their core ethical values, they need
to make the hard decision to change their environment. This change may be simple or complex,
however it has the impact of creating a positive difference in their lives.
CORE ETHICAL VALUES
There are many definitions of ethics, but it is generally accepted that any definition would
include the following core ethical values:
• Honesty - Is truthful, straightforward, sincere, candid. Is not deceptive, tricky, or
• Promise-Keeping - Always strives to keep commitments; is reliable and dependable.
• Fidelity/Loyalty - Doesn't talk behind one's back; is faithful to friends, employer,
country and duties. Respects another's privacy and does not compromise confidentiality.
• Fairness - Strives to be equitable, open, just, not prejudiced. Does not discriminate on
improper basis. Is not arbitrary or self serving.
• Respect for Others - Respects freedoms, dignity, and rights of others.
These core ethical values can serve as a tool to identify ethical considerations. Whenever
honesty, integrity, promise-keeping, fidelity, loyalty, fairness, caring, compassion, respect for
others, personal responsibility come into play, it is always an ethical consideration.
• Personal Responsibility/Accountability - Considers consequences and
accepts responsibility for actions and inactions; doesn't shift blame or make
To be responsible is to be reliable and trustworthy. This is an essential element in the ethic of
the professional insurance agent because the insurance business is built on trust. The
insurance agent possesses specialized knowledge of needs and products which is not easily
accessible to the average consumer. As a result, clients must rely on agents for their
professional expertise. Insurance agents have an ethical obligation to accept and fulfill their
responsibilities to the best of their abilities.
• Integrity - Is honorable; has courage of conviction; stands up for beliefs; puts
principle over expediency. Is not hypocritical, weak, or dishonorable.
Integrity is the state of being of sound moral principle. Professional ethics is built on integrity.
When people talk about professional ethics, they are really examining how to conduct business
Integrity is being willing to risk anything and everything for the sake of being honest. It is
incorruptible no matter what the temptation to be dishonest. A person who has integrity does
the right thing regardless of the consequences.
At all times, insurance agents must remember that what they do affects the very lives of their clients --
their health, their property, their homes, their education, their jobs. It is a very serious responsibility
that must not be taken lightly.
A professional insurance agent makes certain that every act he or she performs is performed
with personal integrity of the highest order. Not only does such an agent observe all prohibitions, but he or
she bends over backward to avoid the slightest appearance of unethical practice.
• Caring/Compassion - Is considerate, kind, sharing, charitable. Is not selfish,
manipulative or controlling.
Caring is the motivation behind the work of the professional insurance agent. No amount of
money or recognition is reward enough for the challenges that insurance agents must face day
after day and year after year in their careers.
Caring also enables professional insurance agents to act in their clients' best interests. If
agents care about their clients, they will do for their clients what they would do for themselves if
they were in the clients' situation.
Selflessness is the opposite of selfishness. Selfishness is a concern only with oneself and a
disregard for others. The insurance business is no place for the selfish. Insurance agents have
to put others first. Because the purpose of the insurance business is to be of service to others,
insurance agents succeed by putting others first. By directly serving others' best interests, they
indirectly serve their own interests.
Selflessness means being generous, of giving more than the minimum required by any
situation. Successful insurance agents find that the more they give to their clients, the more
their clients give back to them.
It takes courage to be ethical. The right thing may always be the best thing in the long term, but
in the short term there may be a price to pay. To be ethical, individuals may find that they have
to stand up to a customer, or to an esteemed colleague, or to a superior, or even to their
families who don't want to risk the material loss that holding to the ethical line might bring. It
takes courage to stand up to those persons, whose expectations we are ordinarily eager to
meet. Courage is the quality that converts ethical intention into ethical action.
Courage is a universally admired trait. When individuals demonstrate that they have the
courage to stand up for principle, they win the respect of their peers, their superiors, their
customers, and their family. Individuals who at first feel alone when faced with an ethical
situation requiring courage often end up finding a great deal of support for having done the right
One situation that takes courage for an agent is declining to work with an individual who is
unethical. Better to give up one sale than to try to build a career out of ethically compromised
actions. It's easier and more profitable for agents to work with ethical people who will
appreciate the value of their services as well as their ethical orientation, and who will refer them
to more people whose values they share.
Excellence is the quality of being outstanding. To be the best one can be, certainly requires
Gains obtained through unethical actions are lost eventually, and along with them reputation,
self-esteem, trust, and perhaps the means of making one's livelihood are also lost. On the other
hand, the ethical individual builds success on solid ground through the respect and confidence
of customers and colleagues, and through self-esteem.
In the insurance business, ethical behavior and excellence go hand in hand. Studies have
shown that individuals who value ethical behavior are generally more successful in their careers
than individuals who do not value ethical behavior.
THE GOLDEN VS. THE PLATINUM RULE
Throughout history philosophers and religious leaders have expressed the need for humans to
treat one another fairly and honestly. People are all familiar with the Golden Rule. “Do unto
others as you would have them do unto you.” Most people learned it as children and have
taught it to their children. It's hard to go wrong by following the Golden Rule. To paraphrase, it
says, "Treat others as you would like them to treat you."
Failure to apply the Golden Rule will result in two separate standards of ethics. One standard is
how they treat others; the second is how they expect others to treat them. It is a good starting
point for people to think about ethics.
A corollary to the Golden Rule is the Platinum Rule, which states: “Do unto others as they would
like you to do unto them.” To paraphrase, it says: "Treat others the way they would like to be
treated." The Platinum Rule is more appropriate than the Golden Rule. When people apply the
Platinum Rule in their dealings with clients, they do not force their values upon others. They
genuinely listen to the other person’s needs and then strive to meet those needs.
A career in insurance is more than just another job. It's a profession. It is a field upon which
our society is depending more and more for both accumulation of wealth and protection from
financial disaster. An agent must look at more than just the commercial side of the business.
Yes, there's money to be made in selling insurance; but the welfare of their clients is even more
important than the personal gain realized from sales. Insurance agents have a professional and
ethical responsibility to their own clients and to all other members of the insuring public, to the
company, to themselves and even to their competition.
Professions like medicine and the law have become increasingly aware that just to say their
practitioners are professional is not enough: their practitioners must behave in a professional
manner. Malpractice suits against both physicians and lawyers have shown that the public no
longer stands in awe of these professions. The public expects certain things of those who call
THE EVOLUTION OF PROFESSIONS
The well recognized and honored professions of clergy, medicine, law and accounting were not
always distinguished by the same degree of respect afforded them today. In the early days, for
example, medicine started as a mere vocation or trade and evolved through successive stages
of development until it achieved professional status. In its beginning years, almost anyone who
chose to "practice" medicine could do so simply by setting himself up in business.
A little study and a brief period of apprenticeship was all that was required in the way of
preparation. Such things as entrance requirements, a prescribed pattern of preparation, a
series of in-depth examinations, an altruistic attitude and behavior, a strict code of personal
ethics, a unified body of knowledge plus the other characteristics, which distinguish the presentday
professions, simply did not exist or if any of them did exist, they were extremely superficial
Some people occupy special roles in business which require a higher degree of public trust.
These people are called "professionals." There was a time when only practitioners of medicine
and law, and those who received degrees from theological colleges were called "professionals."
All other occupations were simply work. But over the years, it has come to be understood that
the same hallmarks that make medicine, the law, and theology professions can apply to other
Altruistic or unselfish devotion in ministering to the needs of mankind appears to be the most
fundamental and common element possessed by the two earliest professions-the clergy and
The early clergymen and medical men professed both technical skill and specialized knowledge
of their respective "fields of learning" in order to minister properly to the needs of those whom
they served. In these earliest professions the two most basic characteristics which tended to
differentiate them from the other vocations were, (1) a life of dedicated devotion to the needs of
others, and (2) the possession of specialized knowledge derived from study of the field together
with a practical application of this knowledge in the form of technical skills or abilities.
There has been a long-standing discussion as to whether licensed insurance agents and
brokers are truly professionals or simply individuals engaged in an occupation. Originally the
term professional was used only to describe those who made a public declaration of their faith
by entering a religious order. Over the years the term has come to apply to a calling requiring
specialized knowledge and often long academic preparation. On the other hand, the term
occupation tends to include any work activity, especially activities that require little formal
education or training.
Many people have tried to clearly define the characteristics that distinguish a profession from
other occupations. Many would argue that only the so-called leamed professions-medicine, law
and theology-should be regarded as true professions. However, others feel that those
individuals who practice the desirable characteristics of such as high ethical standards, concern
for the welfare of others and mandatory education and training, should also be considered
PRIMARY CHARACTERISTICS OF A PROFESSION
Although there is no unanimous definition of a profession, the essential characteristics or criteria
of a profession provide some basis for a working definition of the professional concept. All
definitions have one basic characteristic in common, a moral or ethical code.
Beyond this need for a high degree of morality, the individual definitions include such concepts
as standards for admission and conduct, general and special education, a unified body of
knowledge and qualifying examinations, all of which are requisite to a profession. Most of the
requisites have been incorporated into the following definition which might well serve as a
"standard" definition in viewing the various aspects of professionalism.
The Hallmarks of Professionals include:
• A commitment to high ethical standards
• A prevailing attitude of altruism
• Mandatory educational preparation and training
• Mandatory continuing education
• A formal association or society
• Public recognition as a profession
High ethical standards
• A professional individual has a commitment to high ethical standards, being careful to
avoid any practice of behavior which violates the code of the profession as well as his or
her own personal ethical code.
Concern for the welfare of others
• A professional individual has a concern for the welfare of others which transcends
concern for his or her own welfare when engaged in the practice of the profession.
Mandatory education and training
• A professional individual understands the need for mandatory licensing and education,
and knows that continuing education in the field is essential if he or she is to serve the
public with skill and competence.
• A professional individual is normally a member of a professional association or society
which encourages high ethics, education, and competence among its members.
• A professional individual has the ability to act with objectivity and integrity, and does so
act in all professional activities.
The public expects all these hallmarks from any occupation which proclaims itself to be a
profession. They expect members of that profession to put their welfare first, and to instruct
them about matters essential to that welfare. They expect members of that profession to keep
any information confidential they may have about the client.
And they expect members of that profession to not only know what they know, but to be aware
of limitation to their education and experience. Insurance agentsshould get help and advice in
situations which are beyond their education and experience.
Measured against these desirable characteristics of a profession, most agents should consider
themselves as professionals, individuals with a certain level of competence, part of an
occupational group engaged in a specific and identifiable career.
Groups and associations of Insurance Agents have developed codes of ethics, which
incorporate the principles of commitment to high ethical standards; concern for the welfare of
others; mandatory licensing and training; formal association or society; and the ability to act with
integrity and objectivity.
• The public image of the financial sales person has eroded in recent years, due in part to
the unethical conduct of certain sales people
• The mantle of “professional” implies a certain ethical standard, but also carries with it
increased civil and criminal liability for professional lapses
• The cornerstone principles of professional ethics are honesty, fairness and
• Sales tools and the sales process (methods) used by financial professionals carry the
potential for ethical breaches
Commitment to High Ethical Standards
No amount of government regulation or corporate intervention can prevent some people from
acting unethically or illegally. Some people clearly know the difference between right and wrong
while others must be taught the difference. Those insurance professionals who have strong
moral character will also have high ethical standards.
Insurance agents who wish to be considered professionals must be willing to hold themselves to
a higher standard. The true professional is a person who performs the obligations associated
with his or her job with integrity and competence.
A Carefully Conceived Code of Personal Ethics
A code of ethics is essential to a profession since it provides each member of that profession
with a benchmark or guidepost. A guide is needed so the agent can check it against his
personal conduct and daily decisions to see how well they are measuring up to the standard of
conduct adopted by the profession as a whole.
Altruistic Attitude and Behavior
A profession is altruistic in nature which means that each member is guided by and dedicated to
the humanitarian principle of service rather than personal gain. It is true that a professional must
make a living but this is secondary or incidental. The income from professional pursuits simply
follows as the result for performing acts of public service. Professionals focus maximum
attention on providing unselfish and dedicated service to others while not being concerned with
the money and material rewards with the faith that adequate payment for this service will follow
An agent must place the customer's best interests ahead of his or her own. In the insurance
business, that standard is particularly important to an agent's long-term success. Rarely do
agents build a successful career out of making one-time sales to strangers. Agents need
referrals and repeat sales to build successful lifetime careers. And referrals and repeat sales
only come when a relationship of trust has been established between agents and clients.
True professionals should be more concerned with the welfare of others than with personal
financial gain. Sometimes this is an difficult to practice because our society often defines a
person's business success by the amount of money he or she earns, regardless of the means
by which that wealth was accumulated. Many businesses, including the insurance industry, use
financial rewards to motivate their employees. Incentives such as trips or bonuses based on
production may influence an agent or broker. Although it is possible to be a professional and
provide public service while earning large amounts of money, the producer must always be
aware that he or she is serving in a fiduciary capacity. As such, special rules apply to serving
the best interests of others.
The insurance business is unique in that it sells promises to perform at a future date when it will
be most needed. Through the products they offer, insurance agents provide effective solutions
to individual financial problems when a loss occurs. Although insurance professionals should
be financially rewarded for their service, serving the needs of individuals and the general public
is often their most meaningful reward.
Mandatory Licensing and Training
All states have laws requiring insurance agents, brokers and producers to be licensed. The
various state insurance departments administer these laws with the objective of permitting only
competent and honest producers to represent insurance companies. The standards for
licensing vary from state to state.
Many states are encouraging greater professionalism for insurance agents, brokers and
producers. In recent years, numerous legislatures have passed laws that mandate education
before insurance licensing and continuing education laws that mandate education after licensing
and before renewal. Although the goals of the laws may be similar, implementation among the
states is not uniform.
Some states require education in a classroom environment, while others permit self-study
courses. Mandatory continuing education requirements may be met, in some states, through a
correspondence course, on the internet or by attending an insurance seminar. Most states
require that course content be filed and approved before courses can be taught.
A Highly Unified Body of Specialized Knowledge
A profession deals directly with people and tends to identify itself with the desires, needs and
goals of people. An interdisciplinary understanding of the generalized knowledge as contained
in the social sciences of philosophy, psychology, sociology and economics provides the
professional with broader educational background to deal more effectively with the numerous
"human" problems faced in his or her practice. A profession requires a general education in
the liberal arts as well as special education in the specifics of the discipline.
The individual practitioners in the established professions are in possession of a unique or
highly specialized body of knowledge related directly to their profession and not possessed by
those outside the profession. This body of knowledge has been unified out of the mass of
"experiences" accumulated both by their predecessors and their contemporaries.
When a body of specialized knowledge has been unified, it is then possible for persons entering
the field to take full advantage of a more streamlined and efficient process of learning this body
of technical knowledge, related to the field.
A Broad Educational Background Containing Generalized Knowledge
The acquisition only of highly specialized knowledge peculiar to the practitioner's own calling is
not sufficient to provide the total knowledge and skills necessary for truly professional
perfomance. Specialized and technical studies must be supported and supplemented by
greater understanding through acquisition of "general knowledge" to become a well-rounded
professional. The person who has acquired only specialized knowledge usually does not see
over-all effects on his specialty and tends to judge good and evil, right and wrong solely by the
standard of his own specialized knowledge.
The total intellectual equipment of a professional practitioner is multi-disciplinary in nature. The
professional man's area of competence should transcend the boundaries of any single
The profession must be viewed in the larger, interdisciplinary context of psychology, sociology,
ethics, philosophy, economics and politics, so that decisions will not be divorced from the
environmental and institutional framework within which the client lives and works.
Examinations for Determining Mastery of Specialized and Generalized Subject Matter
A profession requires extended professional preparation, of a formal nature, involving a
recognized educational process for acquiring the necessary specialized and generalized
knowledge. This suggests a college or university-type program of organized study
accompanied by examinations to test and determine the degree of mastery of the discipline's
subject matter on the part of each candidate. A system of rigorous and discriminating
examinations is needed to distinguish the capable from the incapable for admission into the
A characteristic of a profession is the testing of the candidates to determine admission to the
profession. Each of the established professions has created an elaborate examination structure
to separate qualified from unqualified persons.
A sound testing procedure must be designed to test not only knowledge of the profession but
also the ability to put this theoretical knowledge into practice. An examination which tests book
learning only, without regard for its practical application, provides no real measure of the
practitioner's true worth to his clients.
Ethical Concerns for Agents
Many ethical problems agents face can be traced to a simple lack of skill and competence. For
example, failure to identify prospects' needs and recommend appropriate products or agents
who misrepresent their ability to provide competent service. These problems would not exist if
agents were knowledgeable and competent. A thoroughly trained, knowledgeable, competent
agent would not fail to identify a prospect's needs nor would the agent have to misrepresent his
or her insurance capabilities.
Skill and Competence
The title of professional carries a reasonable expectation that the individual will have a certain
minimum level of competence. Prospects and clients have a right to expect that any
professional seeking to do business with them is properly skilled, licensed and credentialed.
Ethical sales professionals also demonstrate competence in their line of work and continually
seek to increase their skills and knowledge through continuing education. They do not claim to
have skills or credentials they don’t actually possess. As part of their competence, ethical sales
professionals are diligent in providing a high quality of service to their clients. They are timely in
responding to clients, and provide accurate information in a consistent manner. When service
falls below a client’s expectations, the ethical sales professional seeks to take whatever steps
Competence comes from training and experience. A competent agent or broker provides a
wide variety of services that are essential to providing the proper insurance coverage.
Insurance agents or registered representatives are ethically required to perform their
professional duties with a level of skill and care that can reasonably be expected by clients. By
sharing personal health, financial and other information with sales professionals, clients have
placed them in a position of trust. As a result of that relationship, sales professionals have an
ethical responsibility to put clients first every time they present a recommendation. Placing
clients first requires that sales professionals perform their duties with a level of skill
commensurate with the experience, training and credentials they possess.
When sales professionals are working with senior or disabled clients, the duty to perform with
skill and care may be heightened for several reasons, including the possibility that some clients
may be more trusting and therefore more vulnerable, or have physical or cognitive limitations
that impair their ability to comprehend and understand information.
What many sales professionals may not realize is that their ethical duty to perform with skill and
care applies equally to the completion of any transactions they agreed to undertake for their
The relationship between the professional insurance agent and the policyowner is usually built
on the policyowner's trust in the agent's knowledge and skills. The policyowner must rely on the
agent to provide informed options and trust that the recommendations for insurance are in the
client's best interest.
The professional agent thus has an obligation to ensure that this trust is justified. This means
an agent has the ethical responsibility to:
• Obtain the necessary knowledge and skills to evaluate and service the insurance needs
of clients. Indeed, the term "professional" implies knowledge and skill. If the agent feels
that he or she is not properly trained to perform the needed service, another professional
should be called in to assist.
• Keep his or her base of knowledge and skills current. The agent must be committed to a
program of continuing education. He or she must also stay informed of the latest
developments affecting a client's interests. In recent years, there has been an
increasing trend toward insurance professionalism. Agents should be competent
professionals with a high degree of technical knowledge in a particular area of insurance
and who also place the needs of their clients above the their own.
Agents provide advice to consumers during one of the most complicated purchases they will
ever make. Insurance products have become more and more complex, so there is ample
opportunity for consumers to be confused. Studies show that most consumers lack a clear
understanding of how insurance works, and commonly do not understand what is covered by
their own policies. Only a handful of people actually read the policy or even the sales literature
provided with the policy and even then most do not fully understand it.
The title of “professional” implies an expected level of service. That means that professionals
have an ethical duty to provide service to clients that is:
• Timely, given the nature of the task to be accomplished
• Consistently accurate
If a provided service fails to meet these criteria, professionals are expected to take whatever
remedial action is needed to bring it to acceptable levels as quickly as possible.
Agents have a duty toward their clients to be competent. To sell needs properly, the agent must
have a certain basic level of knowledge about financial needs and the products that can be used
to meet them. An incompetent agent cannot provide service of any value to clients.
Skill and competence are prerequisites to selling insurance. These two qualities are the means
by which an agent provides informed options and recommendations that are in the client's best
interest. An agent has the ethical responsibility to:
• Develop and maintain a high level of knowledge and skill through concentrated study
and dedicated work.
• Acknowledge those situations that are beyond his or her skill level.
There are many specialized areas of knowledge in insurance selling. Beyond a basic level of
competence, agent knowledge will vary. Not even the most advanced agent is an expert in
every area. Agents should seek help from more experienced agents, their managers, or home
office support personnel when they find themselves in a situation where they lack the
competence to serve their clients'needs properly.
Every state, and the District of Columbia, require that licensed agents obtain a specified number
of continuing education hours prior to the agent's license renewal date. How many hours of
continuing education required varies from state to state. It is the responsibility of each agent to
know and understand their state's requirements. Failure to comply with continuing education
requirements will result in the license not being renewed.
To keep themselves up to date, professionals of all kinds, including insurance agents, maintain
a lifelong educational program. Agents are both legally and ethically bound to meet state
continuing education requirements. Professional agents are ethically bound to assess their own
needs for continuing education and engage in ongoing improvement of their knowledge and
skills, whether or not required by law.
Continuing education is one of the hallmarks of a professional, both through formal courses and
informal study on one's own.
Agent education should focus on three areas:
• New products from the company or companies represented;
• Legislation and regulations affecting insurance
• Tax considerations, particularly in the life insurance field.
Agents who are committed to staying current with industry developments are in the best place to
serve their clients well (and are in the best place to survive increased competition such as that
from the financial services industry). The insurance industry has many opportunities for
education and advancement, even college-level programs. Pursuing continuing education,
joining and participating in industry associations, achieving professional designations such as
the CLU and CPCU, are all excellent ways for an agent to demonstrate commitment to clients
and to the profession.
Education is the mark of a true professional. Many agents pursue education that is not required
by the state. Some agents complete education, which leads to specific designations, such as
Chartered Life Underwriter (CLU), Chartered Property Casualty Underwriter (CPCU), or
Registered Health Underwriter (RHU). While such designations do not necessarily mean the
agent is smarter or more skilled than other salespersons, they do show that the agent is serious
about his or her profession. Regardless of the line of work a person is in, additional education is
always a sign of a true professional. This is true of a teacher, an accountant, a doctor, a lawyer,
and certainly an insurance agent.
Insurance agents need to view education as one of their primary responsibilities. Agents
possess information the average person needs and typically does not understand. It is important
for an agent to be ethical, honest, and truthful in the insurance business. But having all of those
traits simply is not enough. An agent must also be knowledgeable and skillful in their trade to be
successful. Education plays an important role in making an ethical sale.
It is common to hear agents and agencies alike complain about the educational requirements of
their state. Some agents look for the shortest or easiest educational course to simply get the
requirements out of the way. Why should a consumer have confidence in an agent that does not
consider education important?
However, we need to ask ourselves this. "Would I feel comfortable doing business with
someone who has been in their business for several years but has not updated their knowledge
since that time?" How much confidence would you have in such a person? The same attitude
holds true for insurance agents. Though actual work experience is important, keeping current on
changes in insurance laws as well as policy changes through formal education are equally as
It is not appropriate for the attending agent to talk to those around him (which is likely to
interfere with the enjoyment and learning of others), read the paper or a magazine, write
personal letters, or work on personal business during the seminar. Most states have specific
rules about continuing education. An agent who must be forced into being responsible about
his or her education cannot be considered ethical or even professional.
Agents are ultimately responsible for their education and this will be reflected in the future work
they do. Some unethical agents have found equally unethical continuing education providers
who may “sell” CE credits without agents having to actually complete any learning or pass any
Not only is this a disservice to the agents and their customers but to society as a whole.
Insurance is so important to a society that it is unconscionable to allow people to provide advice
and sell products when they do not have the necessary knowledge to do so.
Some agents feel they have been in the business too long to learn anything new which is like
the medical doctor who feels education is not necessary for their continued medical practice.
Just as patients would not feel comfortable with such a doctor, clients don’t feel comfortable with
that attitude from insurance their agent.
Continuing to learn, regardless of the number of years in the profession, characterizes a true
professional who realizes that there is always room for growth.
One of the most common elements of professionalism is ethics training. Unfortunately far fewer
hours are spent in ethics training than in sales training. Elevating ethics training to equal footing
with sales training would send a very different message. Not only should ethics training be
afforded the same status as sales training, it should be afforded the same level of investment to
insure it is effective. There is no question that insurance companies have invested heavily to
develop effective sales training to motivate and educate agents. If insurers are serious about
ethics, they need to similarly invest in the development of effective ethics training.
A growing number of states are requiring that agents complete courses in ethics as a part of
their continuing education requirements.
Some companies conduct ethics training sessions. Ethical competency is not simply a matter of
education. It is also a matter of peer pressure. When coworkers expect ethical competency,
others are more likely to act ethically competent. Ethics must be made a part of the decision
making process both by the company management and individual agents and employees. If
employees are to act ethically, however, they must feel confident that their superiors will stand
A person who does not know what changes need to be made, will keep repeating the same
mistakes over and over again.
An agency should not resent or attempt to curtail the time an agent spends to acquire
education, because ultimately the agency also benefits. It is very difficult to get all that is
available out of a course, whether in a live seminar or in a home-study program, if the agent
must rush through it in order to meet a deadline.
A competent, educated agent can educate the public about insurance and help consumers
make informed buying decisions about insurance. To do so, the agent must be knowledgeable
about a broad spectrum of insurance products and should be able to explain the advantages
and disadvantages of different types of policies, costs and terms, provisions, coverages,
exclusions, limitations, etc. It is the mark of a poor agent to conduct a fact-finding analysis and
then consistently recommend the same policy solution to every client. Unscrupulous agents use
the consumer's lack of knowledge to sell inappropriate coverages.
High-quality business requires education. It is important that agents truly understand the product
and services that they are selling. Those who continue their education will be better equipped to
meet the needs of their clients. Continual education also helps agents maintain an interest in
what they are doing by learning new and exciting ways to do things.
Since the financial services industry is constantly changing with new products being introduced,
new tax laws being passed, and new approaches to solving problems being developed,
competence is an ongoing challenge for the insurance agent. An agent's competence will
gradually erode if he or she does not make an effort to keep his or her information up to date.
In the insurance business, increased knowledge equals greater competence. Many agents
today work or plan to work in specialized markets. In these specialized markets there are many
insurance policies available that can be designed to meet clients' needs. The agent must be
aware of any new policies with new features that are introduced.
Insurance agents have to understand the features of these policies, their benefits, limitations
and exclusions. In addition, agents also have to know how these products compare to other
policies their insurer offers as well as how they compare to products of other insurance
Agency managers, agent supervisors, and persons in positions of responsibility in insurance
company home offices also have an ethical obligation to assure that agents are being trained
properly and that agents are offered and encouraged to participate in appropriate continuing
education experiences. The responsibility for training and supervision includes an obligation to
monitor agent behavior on an ongoing basis for both competence as well as ethical practice.
Formal Association or Society
Another characteristic of a profession is the existence of a formalized body of members,
sometimes known as a society or an association, which is designed to achieve more effectively,
as a group, the individual goals, objectives and ideals of each of the members.
The two principal functions performed by professional societies are to (1) establish and police
high standards of ethical behavior and practice among the members, and (2) establish and
maintain high standards of technical performance through programs of continuing education
sponsored by the society. The society organization must pursue every avenue for improving the
ethical behavior and technical performance of each member. A profession establishes and
continuously strives to raise its standards of service to others through continuing education and
study by its practitioners. A profession initiates and stimulates programs of research in both
theory and applied methods in order to extend and broaden its total professional capability.
Many experts feel that professionals must belong to a formal association or society that sets
ethical standards of behavior and provides continuing education programs and publications for
its members. The rationale for requiring a formal association or society is that a professional is
part of a collective group and as such shares certain characteristics, beliefs and aspirations with
other members of that group. A formal association recognizes a sense of fellowship, which
brings together individuals who share common interests, goals and educational backgrounds
and who tend to speak the same technical language that is part of their chosen profession.
In order to accomplish its full mission and aims, each profession must have a nationally
recognized organization with a sufficiently large number of members who adhere to a common
set of high standards for attaining membership, follow a strict code of personal ethics laid down
by the society as a whole and work continuously to improve the profession in its rendering of
better service to the general public.
Ability to Act with Integrity and Objectivity
Professionals should be able to act within their own personal and ethical boundaries while also
acting in the best interests of their clients. This requires a great deal of sound professional skill
and judgment. An insurance professional should serve clients by carefully analyzing their
insurance needs and selling them only the coverages that are needed. However, because an
agent's income is often based entirely on commissions, he or she may be tempted to sell too
much coverage or the wrong kind of coverage to clients.
In order to best serve their clients, insurance professionals must be independent from their
insurers and their clients. The agent must consider the needs of the client before his or her own
commission or fee. In theory this is quite easy to do; however, reliance on commissions to meet
one's mortgage payments and other living expenses can make overselling a tempting
proposition for even the most honest agents.
Public Recognition as a Profession
The recognition of an occupation as a profession hinges on whether it has considerable
prestige, requires special skill or generates substantial income. Although the general public
tends to use the term "professional" loosely, most people do not consider all occupations to
have the same prestige or value. The worth of a career or profession is often judged by the
ethical standards to which its members are held.
THE CRUCIAL ROLE OF ETHICS IN A PROFESSION
Of all the elements which go to make up the total structure of any given profession, the concept
of "ethics" is the very "heart and soul" of the body of members constituting that profession.
Without a carefully conceived concept of ethical values, the idea of a profession, as we know it
today, simply could not exist.
Ethics constitutes the science of ideal behavior, moral character, and humanitarianism. A code
of ethics is a statement of the ideals, principles and standards for professional conduct
approved by the group and voluntarily adhered to by its members. Ethics operates
independently of legal restrictions governing conduct. A member of a profession refrains from
certain behavior not because he is legally compelled to do so but rather because his feelings of
personal respect, ideals of unselfish service and professional attitudes all combine to dictate
ethically approved action.
Principles of Professional Ethics
Principles are one of the components of an ethical system. Professional ethics has three
foundational principles that guide it:
These three principles require certain behavior of sales professionals in these everyday
business activities: advertising, communications and making recommendations to clients.
• A code of professional ethics:
A code is an ethical system of values, principles, laws, rules, standards and norms that
are established and enforced to protect the public good within a given field of expertise.
Every profession uses these three components to govern its actions and monitor and
control its members’ ethical conduct.
In addition, providing a professional standard of client care requires that individual
• Make an individual commitment to ethical conduct
• Identify the individual values, principles and goals that will guide their professional
• Seek the assistance, as appropriate, of other professionals to meet clients’ needs
Although insurance companies have determined the agency system is an expensive way to sell
insurance, it continues to exist because it is still the most effective system. However, some
insurance companies and brokers are experimenting with alternate ways to deliver insurance
products to the consumer, without using agents. At some point in the future, the public may no
longer feel the need for an insurance agent. Consumers already purchase stocks, bonds and
many other financial products and insurance without input from a broker or agent.
Insurance companies will move quickly to less expensive alternative distribution systems.
Unless agents, brokers, registered investment representatives and other financial services
practitioners become more professional -- and the public perceives a greater benefit from the
practitioner’s participation in the sale -- the agency and brokerage systems for distributing
insurance and investment products may wither and die. Ethical business practices are perhaps
the greatest competitive advantage a sales professional has to demonstrate the need for
agencies to consumers.
A professional has the satisfaction of knowing that he is not wasting his or her talents nor his life
merely making money. The professional earns and receives the respect of his community by
performing important work using his or her education and skill.
The title of professional is one for which many individuals and occupations strive. It lends an
aura of respectability and suggests specialized knowledge and high ethical standards. For the
sales professional, that has many positive aspects, including an enhanced public image and a
sense that the individual can be trusted. These qualities often lead to higher levels of success
Commitment to Professionalism
A number of ethical issues can develop when an agent lacks a commitment to professionalism.
For instance, disparaging the competition, failing to be objective with others in business
dealings, not providing prompt, honest answers to clients's questions and failing to provide
products and services of the highest quality in the eyes of the customers were problems the
industry faces. However, agents who make a true commitment to professionalism will not be
have these conflicts. Professionalism requires an agent to:
• Place the client's interest beyond one's own self-interest. Professionals are loyal to their
clients and are dedicated to protecting their clients' welfare. This means they remain
independent and objective in their judgment and evaluations and recommend plans or
policies that most benefit the client.
• Be dedicated to his or her industry and supportive of all its member companies and
representatives. A true professional aligns himself or herself with colleagues and
• Offer quality plans and represent quality companies. A professional agent represents
only those companies with solid financial standings; he or she accurately informs
prospects and clients of an insurer's financial position as part of the sales process.
Seeking Other Professional Resources
Few agents know all the answers to every question that a client may raise-especially if the risk
is an unusual one. If they lack the experience they need, they can find help from more
experienced colleagues, a company underwriter. They may also have to recommend additional
legal, accounting or consulting services to their client when needed. The ethical violation occurs
when they pretend that they have skill and knowledge when, in fact, they do not, or if they
ignore the need to complete the education and training necessary to identify, analyze and treat
a risk properly.
In some circumstances it may be important to suggest that another person be involved in the
decision such as an adult family member or a trusted adviser such as the prospective client’s
attorney, pastor or accountant.
The public also expects professionals to be aware of limitations to their education and experience. Just
as a doctor out of his or her depth in a certain case should get in a specialist, so too should
insurance agents get help and advice in situations which are beyond their education and
If an agent is confronted with a situation in which a client wants him or her to provide products
or services and the agent does not have sufficient education, experience or knowledge to
handle the project, that agent has an ethical responsibility to get advice from a more
experienced, educated agent -- one with practice in that field.
There is little question that individuals seeking to encourage prospects or clients to engage in a
business transaction will want to present themselves in the most favorable light possible.
However, sometimes in an attempt to more favorably present themselves, some individuals
state or imply that they have skills or credentials they don’t actually possess. It is essential that
insurance agents not hold themselves out as having skills or professional credentials they do
not really posses. To do so is unethical, possibly illegal, and will also result in the insurance
agents being held to the standard of the profession that they claim to be.
It is unlikely that any individual will possess all the skills and credentials required to meet the
needs of every prospect and client. Professionals need to limit their advice and services to
areas of professional competence, and to seek the support of other professionals in areas
outside their own. In the case of an insurance professional’s clients, an agent will often require
the services of other professionals, including a(n):
• Trust officer
Typically, an attorney will draw up any required client documents such as a will or trust
agreement, lease, hold harmless agreement or other contract. An accountant is normally
required for any valuations—for example, determining the value of a client’s business. A trust
officer will normally advise clients with respect to their bank’s trust services, etc.
Insurance agents who fail to seek the services of other professionals for their clients such are
exposing themselves to significant liability, doing a disservice to clients and missing an
opportunity to further develop their contacts with other professionals.
Unauthorized Practice of Law
One area where agents need to be aware of their limitations is in regard to the unauthorized
practice of law. Every state requires an individual to be properly licensed as an attorney in
order to practice law, with violations punishable as contempt of court. The statutes themselves
often do not define exactly what constitutes the practice of law, but court cases provide some
• Agents may gather information about a client and discuss general principles of law, but
an agent should never try to apply general legal principles to a client's specific situation.
• Agents should never draft legal documents such as wills or trusts, or even make
notations on such written instruments, nor should agents make specific suggestions to
clients in regard to them.
• Agents should take care to avoid even the appearance of giving legal advice. Any
questions about how a general legal concept would affect the client's specific situation
must be referred to the client's attorney.
Agents must be particularly careful not to cross the line between giving proper and appropriate advice to clients and
engaging in the unauthorized practice of law. Normally, agents will work with a client's attorney and
accountant to come up with an estate or business plan. Agents may also be called upon to
review indemnification agreements and insurance requirements in leases and contracts but
should not go further in interpreting or suggesting modifications in the wording of such contracts
or other documents.
The American Bar Association has distinct opinions about what is ethical and unethical behavior
for insurance agents in these two fields. Briefly, these opinions may be stated as follows:
• Non-lawyers may determine, analyze, and organize the assets of a client to take care of the
needs of the living and of survivors after a death, and may also present general
information about laws that affect asset use.
• Non-lawyers may not do legal research; draw up legal documents, such as a will; put advice in
specific legal terms; or use legal principals to define the client's particular needs.
Insurance agents behave unethically when, they try to steer business to a particular attorney, or when they
try to talk clients out of seeking legal advice. Fee-splitting with attorneys is unethical and in some
A working knowledge of the tax law is essential to professionals in the life insurance, trust, and
accounting disciplines. To say that non-attorneys cannot discuss any pertinent legal principles
with a client would be unrealistic.
It is sometimes difficult to draw the boundaries of professional responsibility in an area as
complex and sophisticated as estate planning. Special skills and learning are necessary
prerequisites not only to the attorney but also to a CPA, CFP, ChFC, CLU, trust officer, or other
individual serving a client in an advisory capacity. Yet it is clear that regardless of how
knowledgeable an advisor is, only the attorney may practice law. The practice of law is
regulated and limited for a number of reasons:
• First, the public needs and deserves protection against advice by self-styled advisors
who have been neither trained nor tested or licensed by recognized educational or
• Second, many non-lawyers who are highly skilled in specific areas such as tax law may
lack the broader viewpoint and depth provided by having a complete legal education.
Essentially, where a statute or legal interpretation has become so well-known and settled that
no further legal issue is involved, there should be no problem in suggesting its simple
application on a general basis. No violation arises from the sharing of legal knowledge which is
either general information or common knowledge. Providing advice involving the application of
legal principles to a specific situation, however, is clearly the “practice of law”.
The non-attorney should not, however, answer “difficult” or “complex” questions of law. When
basic legal principles are applied to specific and actual facts or the resolution of controversial or
uncertain questions of law is required in an actual case, the practice of law is involved.
Even where the non-lawyer is both a specialist and an acknowledged expert in the field, the
interest of the public is not protected by narrow specialization of a person who lacks the broad
perspective and orientation of a licensed attorney. That dimension of skill and knowledge comes
only from a thorough understanding of legal concepts, processes, and the interaction of all the
branches of law.
• Third, the lawyer-client relationship is one of confidentiality, relative objectivity, and
impartiality. Even the most ethical sales person, service provider, or trust officer cannot
claim complete objectivity; his job is to sell a given policy, investment, contract, service,
or the use of a particular financial institution.
This does not imply that the financial planner, agent or advisor or trust officer or CPA is not an
important member of the estate planning team. The attorney should also not be “practicing”
insurance, providing trust services, or accounting. Each member serves the client with his own
special and essential skills. The client is best served if the attorney and non-attorney work
together to formulate, implement, qualify, and maintain a plan which suits the client’s needs and
The preparation of instruments and contracts by which legal rights are secured constitutes an
invasion of the attorney’s authority. The non-attorney who drafts a will or a trust for a client is
guilty of the unauthorized practice of law. Each state has the right to decide — independently
from all other states — what is meant by the “unauthorized practice of law,” so agents should
always consult the laws of their state to determine if they are in violation.
Agents should not rely on the fact that they are performing these services without pay.
Most courts have found violations where clients relied on advice or were provided with legal
services regardless of whether or not fees were charged.
When it comes to the professional principle of fairness, ethical sales professionals disclose any
conflict of interest, as well as professional fees, to their prospects and clients – and protect their
loyalty and confidentiality to their clients, employers and associates.
The term “fairness” has many possible meanings including “just and impartial”. For the sales
professional fairness involves disclosure of :
• Conflict of interest
• Professional fees
The ethical mandates with respect to selling in the insurance market are complete disclosure,
balanced recommendations and an avoidance of anything that may mislead. The objective of
the sales process is to make the prospect fully informed and capable of making an appropriate
The Value and Price of Being a Professional
Being considered a professional in the eyes of the client and society generally carries with it
certain benefits such as a heightened public image, a greater measure of trust and often,
increased success and compensation.
This recognition as a “professional” comes at a price, however. The consequences of being
considered an insurance professional, as opposed to simply a person who sells insurance
policies or securities, include:
• The imposition of higher standards of conduct and service
• A greater potential liability imposed by the courts
The identification of the financial sales person as a professional is particularly important
because the images of the life insurance agent and registered representative have eroded in
recent years due, in part, to the unethical sales conduct of certain sales people. Being
considered a professional, however, may result in the sales person being held to a higher
standard and the imposition of increased civil and criminal liability for professional lapses.
Despite that possible increased liability and higher standards, the very future of the life
insurance and investment business may depend on the increased professionalism of its sales
PROFESSIONAL CODES OF ETHICS
Laws and law enforcement develop from those values and principles that a society has
internalized. Compliance with society's values was originally assured through application of
peer pressure and the moral persuasion of the group as a whole or by the strength of its
leaders. Creation of written laws and formal punishments for violating those laws came much
later. With the limited economic resources that a society can allocate to enforcement of law,
society must look to its members to formulate some sort of self-regulation in the form of codes
of conduct or ethics.
Professional Codes of Ethics have been developed by various organizations to provide
professionals with working guidelines that go beyond the minimum that is required by law. A
professional code of ethics can accomplish a number of things.
• To offer a professional a series of guidelines for work-related decision making.
• To standardize the expectations of both the public and the professional.
• To serve as an aid for the professional in reaching the level of trust which the public has
come to expect.
Ethics are standards of an aspirational and inspirational nature reflecting commitments to a
model of exemplary professional conduct. Every major profession has adopted some form of a
Code, Canon, or set of guidelines as to what the profession expects of its members.
Professional organizations need codes of conduct for several purposes:
• As a means of creating standards by which conduct can be measured both by the
member and by the group itself.
• As a way to acknowledge an obligation to society, to the professional group, and to the
• To assure the profession will be governed by high standards.
• As a means of examining priorities and building a tradition based on integrity.
• As a limitation on power. The attorney, accountant, trust officer, life insurance agent, and
other members of the estate planning team all know things the client does not. This
special knowledge gives the professional power over a layman who must put great faith
and trust in (and take great risk in the accuracy and appropriateness of) what he is told.
The client cannot possibly know the full extent of the problems, possibilities, and
consequences without the assistance of the expert.
• To provide guidance when people are confronted with a new or unfamiliar situation.
• To maintain trust between an insurance or a financial services professional and the
clients he or she serves.
• To provide guidance beyond just doing what is legal or regulated practices
No business can exist without establishing guidelines. Guidelines include, of course, office
procedures, sales procedures and daily conduct. These guidelines also include a code of
ethics, whether that code is written or merely implied. Every business tells their employees
what actions are right and wrong in their workplace.
People are not things to be manipulated by techniques and sales pitches. Manipulating people
shows a lack of respect for who they are. Selling should not be a combative situation.
One way many professional and business organizations have attempted to address ethics is by
establishing codes of ethics. Codes of ethics should clearly define the purpose of the
organization, what it hopes to accomplish and how it plans to achieve those goals. Such codes
are frequently included in personnel policy manuals and often reference activities such as
conflicts of interest, proper use of company assets and property, compliance with the law and
maintenance of a high standard of ethical conduct.
In order for codes of ethics to be effective, however, involvement and support must come from
the top management of the corporation in the form of time, money and resources. If
corporations expect their employees to follow certain codes of conduct, then management must
lead by example. They should extend empathy, respect, fairness, loyalty and equity to their
employees as well as their clients. In a best case scenario, the corporation will find a balance
between the needs of its employees and the needs of the company.
Many businesses have a written code of ethics which is rarely discussed or invoked. This
makes it difficult for employees to follow it. However, some companies actually hold ethic
training classes or seminars that teach proper ethical behavior. In the insurance industry
specific ethics training courses are becomming required for agents and other professionals to
renew their licenses.
When ethical codes are clearly stated and demonstrated by a company, the lower management
and staff are more likely to behave ethically themselves because they know it is expected.
A written code of ethics that is buried in a company manual, but seldom discussed, is not likely
to be taken seriously by the employees of the company. This is especially true when
management does not appear ethical themselves. Employees certainly want to be recognized,
so it simply makes sense for management to recognize ethical behavior. Such recognition will
promote ethical behavior among the employees, which will benefit the company itself. On the
other hand, if top management seems only to recognize sales without any concern as to how
they are achieved, the message will be clear to the sales force.
Sometimes ethical behavior is aided by advancing technology. People may act more ethically
simply because they realize that their chances of being caught in unethical actions are greater
today than in the past. Today, with the aid of computers, information is much more available to a
greater number of people almost instantaneously.
The Codes of Professional Ethics summarizes the types of professional conduct that the
drafters and supporters of the code regard as desirable on the part of insurance professionals
and defines a minimal standard of ethical conduct for those bound by the code. The code has
to do with the attitudes and behavior that insurance professionals must exhibit as they do their
part to help insurance "to work.”
An increasing emphasis on ethics and morality is taking place in business, government,
education, and entities, codes of ethics have been formulated and published by a wide variety of
organizations. These codes display a tremendous variation in detail and in provisions, if any,
which the issuing organizations can discipline those subject to the code whose behavior fails to
In the insurance industry there are a variety of organizations dedicated to professionalism. Each
has its own code of ethics. Codes of Ethics bolster the efforts of the NAIC and state regulators to
regulate areas of the insurance industry that are key in its ability to serve the public fairly.
Ethics is not separate, or apart, from the rest of life – it is a part of everything people do and
say. Ethics shapes the manner in which they treat people whether they know them or not. Ethics
belongs in every profession and helps guide their actions in financial and public matters.
In order for ethics codes to be effective, they should become a living part of everyday work life.
It needs to be relevant to the situations agents face each day, practical, supported at all levels
of the organization, part of the expectations for performance, and a basis for rewards.
Most codes for insurance professionals share six common themes. Each code:
• specifies that professionals, must comply with the law.
• calls on people to put the interest of the client above their own personal gain.
• asks people to conduct themselves with truthfulness.
• specifies that they are to protect the confidentiality of the business discussed with
• calls upon insurance professionals to continue the learning process throughout their
• asks them to conduct themselves in such a way as to bring honor to themselves and to
the insurance profession.
Here are some of the points commonly included in codes of conduct for members of
professional insurance organizations:
• Place the customer's interest first
• Know your job - and continue to increase your level of competence
• Identify customers needs and recommend products and services that meet those needs
• Accurately and truthfully represent products and services
• Use simple language; talk the layman's language when possible
• Stay in touch with customers and conduct periodic coverage reviews
• Protect your confidential relationship with your client
• Keep informed of and obey all insurance laws and regulations
• Provide exemplary service to your clients
• Avoid unfair or inaccurate remarks about the competition
The public's trust and confidence is enhanced by an insurance agent's adherence to a code of
ethics provided by a professional association or organization. When insurance professionals
strive to live by these ethical guidelines, they strengthen the status and standing of all insurance
professionals in the eyes of the public.
Codes of ethics usually require that professionals keep pace with rapidly changing conditions
and current issues in insurance regulation. They further require that professionals keep
informed on those technical matters that are essential to the maintenance of professional
competence. Codes emphasize a high level of professional competence and adherence to lofty
ethical standards as the most important characteristics of a true professional.
The codes of ethics developed by professional associations apply general ethical concepts to
the specific types of activities in which those professionals engage as you will see in the sample
codes that follow.
Sample Professional Codes of Ethics
Independent Insurance Agents Of America
I believe in the insurance business and its future, and that the Independent Insurance Agent is
the instrument through which insurance reaches its maximum benefit to society and attains its
most effective distribution
I will do my part to uphold and build the Independent Agency System which has developed
insurance to its present fundamental place in the economy of our nation. To my fellow
members of the lndependent lnsurance Agents of America, I pledge myself always to support
right principles and oppose bad practices in the business.
I believe that these three have their distinct rights in our business.- first the Public, second, the
Insurance Companies, and third the Independent Insurance Agents, and that the rights of the
Public are paramount.
To the public
I regard the insurance business as an honorable occupation and believe that it affords me a
distinct opportunity to serve society.
I will strive to render the full measure of service that would be expected from an Independent
Insurance Agent. I will analyze the insurance needs of my clients, and to the best of my ability,
recommend the coverage to suit those needs.
I will endeavor to provide the public with a better understanding of insurance.
I will work with the national, state, and local authorities to heighten safety and reduce loss in my
I will take an active part in the recognized civic, charitable, and philanthropik movements which
contribute to the public good openly community.
To the companies
I will respect the authority vested in me to act on their behalf.
I will use care in the selection of risks, and do my utmost to merit the confidence of my
companies by providing them with the fullest creditable infomiation for effective underwriting, nor
will I withhold information that may be detrimental to my companies' sound risk taking.
I will expect my companies to give to me the same fair treatment that I give to them.
To fellow members
I pledge myself to maintain friendly relations with other agencies in my community.
I will compete with the nian honorable and fair basis, take no false statements, nor any
misrepresentation or omiission of facts.
I will adhere to a strict observance of all insurance laws relative to the conduct of my business.
I will work with my fellow Independent Insurance Agents for the betterment of the insurance
Realizing that only by unselfish service can the insurance industry have the public confidence it
merits, I will at all times seek to elevate the standards of my occupation by governing all my
business and community relations in accordance with the provisions of this Code and by
inspiring others to do likewise.
American Institute for Chartered Property and Casualty Underwriters
Code of Professional Ethics
Canons and Rules
CPCUs Should Endeavor at All Times to Place the Public Interest Above Their Own.
Rules of Professional Conduct
Rl.l A CPCU has a duty to understand and abide by all Rules of conduct which are
prescribed in the Code of Professional Ethics of the American Institute.
RI.2 A CPCU shall not advocate, sanction, participate in, cause to be accomplished, otherwise
carry out through another, or condone any act which the CPCU is prohibited from performing by
the Rules of this Code.
CPCUs Should Seek Continually to Maintain and Improve Their Professional Knowledge, Skills,
Rules of Professional Conduct
R2.1 A CPCU shall keep informed on those technical matters that are essential to the
maintenance of the CPCU's professional competence in insurance, risk management, or related
CPCUs Should Obey All Laws and Regulations, and Should Avoid Any Conduct or Activity
Rules of Professional Conduct
R3.1 In the conduct of business or professional activities, a CPCU shall not engage in any act
or omission of a dishonest, deceitful, or fraudulent nature.
R3.2 A CPCU shall not allow the pursuit of financial gain or other personal benefit to interfere
with the exercise of sound professional judgment and skills.
R3.3 A CPCU will be subject to disciplinary action for the violation of any law or regulation, to
the extent that such violation suggests the likelihood of professional misconduct in the future.
CPCUs Should Be Diligent in the Performance of Their Occupational Duties and Should
Continually Strive to Improve the Functioning of the Insurance Mechanism.
Rules of Professional Conduct
R4.1 A CPCU shall competently and consistently discharge his or her occupational duties.
R4.2 A CPCU shall support efforts to effect such improvements in claims settlement, contract
design, investment, marketing, pricing, reinsurance, safety engineering,
CPCUs Should Assist in Maintaining and Raising Professional Standards in the Insurance
Rules of Professional Conduct
R5.1 A CPCU shall support personnel policies and practices which will attract qualified
individuals to the insurance business, provide them with ample and equal opportunities for
advancement, and encourage them to aspire to the highest levels of professional competence
R5.2 A CPCU shall encourage and assist qualified individuals who wish to pursue CPCU or
other studies which will enhance their professional competence.
R5.3 A CPCU shall support the development, improvement, and enforcement of such laws,
regulations, and codes as will foster competence and ethical conduct on the part of all insurance
practitioners and inure to the benefit of the public.
R5.4 A CPCU shall not withhold information or assistance officially requested by appropriate
regulatory authorities who are investigating or prosecuting any alleged violation of the laws or
regulations governing the qualifications or conduct of insurance practitioners.
F:\Books\Ethics & the Insurance Agent.doc 8/17/2005
CPCUs Should Strive to Establish and Maintain Dignified and Honorable Relationships with
Those Whom They Serve, with Fellow Insurance Practitioners, and with Members of Other
Rules of Professional Conduct
R6.1 A CPCU shall keep informed on the legal limitations imposed upon the scope of his or
her professional activities.
R6.2 A CPCU shall not disclose to another persona any confidential information entrusted to, or
obtained by, the CPCU in the course of the CPCU's business or professional activities, unless a
disclosure of such information is required by law or is made to a person who necessarily must
have the information in order to discharge legitimate occupational or professional duties.
R6.3 in rendering or proposing to render professional services for others, a CPCU shall not
knowingly misrepresent or conceal any limitations on the CPCU's ability to provide the quantity
or quality of professional services required by the circumstances.
CPCUs Should Assist in Improving the Public Understanding of Insurance and Risk
Rules of Professional Conduct
R7.1 A CPCU shall support efforts to provide members of the public with objective information
concerning their risk management and insurance needs, and the products, services, and
techniques which are available to meet their needs.
R7.2 A CPCU shall not misrepresent the benefits, costs, or limitations of any risk management
technique or any product or service of an insurer.
CPCUs Should Honor the Integrity and Respect the Limitations Placed upon the Use of the
Rules of Professional Conduct
R8.1 A CPCU shall use the CPCU designation and the CPCU key only in accordance with the
relevant GUIDELINES promulgated by the American Institute.
R8.2 A CPCU shall not attribute to the mere possession of the designation depth or scope of
knowledge, skills, and professional capabilities greater than those demonstrated by successful
completion of the CPCU program.
R8.3 A CPCU shall not make unfair comparisons between a person who holds the CPCU
designation and one who does not.
R8.4 A CPCU shall not write, speak, or act in such a way as to lead another reasonably to
believe the CPCU is officially representing the American Institute, unless the CPCU has been
duly authorized to do so by the American Institute.
CPCUs Should Assist in Maintaining the Integrity of the Code of Professional Ethics.
Rules of Professional Conduct
R9.1 A CPCU shall not initiate or support the CPCU candidacy of any individual known by the
CPCU to engage in business practices which violate the ethical standards prescribed by this
R9.2 A CPCU possessing unprivileged information concerning an alleged violation of this Code
shall, upon request, reveal such information to the tribunal or other authority empowered by the
American Institute to investigate or act upon the alleged violation.
R9.3 A CPCU shall report promptly to the American Institute any information concerning the use
of the CPCU designation by an unauthorized person.
National Association of Life Underwriters (NALU)
The National Association of Life Underwriters (NALU) is a trade association whose members
are life insurance agents from across the U.S. Headquartered in Washington, DC, the NALU
provides a wide variety of services and benefits to members and to the life insurance industry in
The National Association of Life Underwriters Code of Ethics
PREAMBLE: Those engaged in life underwriting occupy the unique position of liaison between
the purchasers and the suppliers of life and health insurance and closely related financial
products. Inherent in this role is the combination of professional duty to the client and to the
company, as well. Ethical balance is required to avoid any conflict between these two
obligations. Therefore, I believe it to be my responsibility
1. To hold my profession in high esteem and strive to enhance its prestige.
2. To fulfill the needs of my clients to the best of my ability.
3. To maintain my clients'confidences.
4. To render exemplary service to my clients and their beneficiaries.
5. To adhere to professional standards of conduct in helping my clients to protect insurable
obligations and attain their financial security objectives.
6. To present accurately and honestly all facts essential to my clients' decisions.
7. To perfect my skills and increase my knowledge through continuing education.
8. To conduct my business in such a way that my example might help raise the
professional standards of life underwriting.
9. To keep informed with respect to applicable laws and regulations and to observe them in
the practice of my profession.
10. To cooperate with others whose services are constructively related to meeting the needs
of my clients.
National Association of Fraternal Insurance Counsellors (NAFIC)
The National Association of Fraternal Insurance Counsellors (NAFIC) is a professional
organization of sales personnel for fraternal benefit life insurance societies. It is headquartered
in Sheboygan, Wisconsin.
Code of Ethics Of the Fraternal Insurance Counsellor
Preamble: as a fraternal life underwriter, I will maintain the utmost professional standards
toward my client and at the same time maintain a position of trust and loyalty to my Society. I
will maintain the highest ethical balance between these two obligations.
I BELIEVE IT TO BE MY RESPONSIBILITY
To hold the life insurance profession in high esteem and to constantly strive to advance the
prestige of legal reserve Fraternal Life Insurance.
To develop my ability and improve my knowledge through regular study, and encourage other
underwriters to do likewise.
To respect my client's confidence and to hold in trust any personal information.
To present accurately and completely all of the facts essential to my client's decision and to
always place his best interests and welfare above any personal consideration.
To refuse any person or persons any part of my commissions or earnings as an inducement to
purchase life insurance.
To submit complete and accurate applications for membership and insurance on only those
persons whom I believe to have the proper moral and medical requirements that conform with
my Society's underwriting rules.
To cooperate with my fellow associates in all insurance organizations in furthering the best
interests of the Institution of Life Insurance.
As a Fraternal Insurance Counsellor, I pledge myself to uphold and maintain these principles
Million Dollar Round Table (MDRT)
The Million Dollar Round Table is an organization whose members qualify for inclusion by
meeting certain production and persistency objectives over the course of the year. Considered
to be among the most prestigious of insurance sales organizations, the MDRT is headquartered
in Park Ridge, Illinois.
thics of the Million Dollar Round Table
Members of the Million Dollar Round Table should be ever mindful that complete compliance
with and observance of the Code of Ethics of the Million Dollar Round Table shall serve to
promote the highest quality standards of membership. These standards will be beneficial to the
public and the life insurance industry, and its related financial products. Therefore, members
and provisional applicants shall:
1. Always place the best interests of their clients above their own direct or indirect interests.
2. Maintain the highest standards of professional competence and give the best possible
advice to clients by seeking to maintain and improve professional knowledge, skills, and
3. Hold in the strictest confidence, and consider as privileged, all business and personal
information pertaining to their clients'affairs.
4. Make full and adequate disclosures of all facts necessary to enable their clients to make
5. Maintain personal conduct which will reflect favorably on the life insurance industry and
the Million Dollar Round Table.
6. Determine that any replacement of a life insurance or financial product must be
beneficial for the client.
7. Abide by and conform to all provisions of the laws and regulations in the jurisdictions in
which they do business.
1991 Million Dollar Round Table
The American College
The American College is a fully accredited institution of higher learning. It is located in Bryn
Mawr, Pennsylvania, but offers courses to life insurance professionals across the U.S. leading
to the highly respected Chartered Life Underwriter (CLU) and Chartered Financial Consultant
(CHFC) designations. The American College Code of Ethics consists of two parts, the
Professional Pledge and eight Canons. Both parts of the American College Code of Ethics
The American College Code of Ethics
The Pledge to which all CLU and CHFC designees subscribe is: "In all my professional
relationships, I pledge myself to the following rule of ethical conduct: I shall, in light of all
conditions surrounding those I serve, which I shall make every conscientious effort to ascertain
and understand, render that service which, in the same circumstances, I would apply to myself."
The eight Canons are:
• Conduct yourself at all times with honor and dignity.
• Avoid practices that would bring dishonor upon your profession or the American College.
• Publicize your achievement in ways that enhance the integrity of your profession.
• Continue your studies throughout your working life so as to maintain a high level of
• Support the established institutions and organizations concerned with the integrity of
• Participate in building your profession by encouraging and providing appropriate
assistance to qualified persons pursuing professional studies.
• Comply with all laws and regulations, particularly as they relate to professional and
The American Society of CLU and CHFC
The American Society of CLU and CHFC is a professional association of individuals who have
earned or who are working toward the CLU and/or the CHFC designation conferred by the
American College. Although the American Society is a separate organization from the
American College, it is also based in Bryn Mawr, Pennsylvania. The Code of Ethics of the
American Society of CLU and CHFC is founded upon two ethical imperatives. These two
imperatives, which are general in nature, are then broken down into a number of specific guides
to conduct. These guides are then further explained by interpretive comments that clarify their
Code of Ethics Of the American Society of CLU and CHFC
First Imperative: To competently advise and serve the client...
Guide 1.1: A member shall provide advice and service which are in the client's best interest.
A. A member possessing a specific body of knowledge which is not possessed by the
general public has an obligation to use that knowledge for the benefit of the client and to avoid
taking advantage of that knowledge to the detriment of the client.
B. In a conflict of interest situation, the interest of the client must be paramount.
C. The member must make a conscientious effort to ascertain and to understand all
relevant circumstances surrounding the client.
D. A member is to accord due courtesy and consideration to those engaged in related
professions who are also serving the client.
E. A member is to give due regard to any agent-principal relationship which may exist
between the member and such companies as he may represent.
Guide 1.2: A member shall respect the confidential relationship existing between client and
A. Competent advice and service may necessitate the client sharing personal and
confidential information with the member. Such information is to be held in confidence by the
member unless released from the obligation by the client.
Guide 1.3: A member shall continue his education throughout his professional life.
A. To advise and serve competently, a member must continue to maintain and to improve
his professional abilities.
B. Continuing Education includes both the member adding to his knowledge of the practice
of his profession; and, the member keeping abreast of changing economic and legislative
conditions which may affect the financial plans of the insuring public.
C. A member may continue his education through formal or informal programs of study or
through other professional experiences.
Guide 1.4: A member shall render continuing advice and service.
A. Advice and service, to be competent, must be ongoing as the client's circumstances
change and as these changes are made known to the member.
B. A client with whom a member has an active professional relationship is to be informed of
economic and legislative changes which relate to the client-member relationship.
Second Imperative: To enhance the public regard for professional designations and allied
professional degrees held by members...
Guide 2. 1: A member shall obey all laws governing his business or professional activities.
A. Business activities are non-personal activities carried on outside the life insurance
community; professional activities are non-personal activities carried on within the life insurance
B. A member has a legal obligation to obey all laws applicable to his business and
professional activities. The placement of the Guide within the Code raises this obligation to the
level of an ethical obligation.
Guide 2.2: A member shall avoid activities which detract from the integrity and professionalism
of the Chartered Life Underwriter designation, the Chartered Financial Consultant designation,
or any other allied professional degree or designation held by members.
A. Personal, business, and professional activities are encompassed within the scope of this
B. Activities which could present a violation of this Guide might include:
• A member's failure to obey a law unrelated to the member's business or professional
• A member impairing the reputation of another practitioner.
• A member unfairly competing with another practitioner.
• Actions which result in the member discrediting his own reputation.
• A member discrediting life underwriting as a profession, the institution of life insurance,
or the American Society of CLU & CHFC.
• A member advertising the Chartered Life Underwriter or Chartered Financial Consultant
designation or membership in the American Society in an undignified manner, or in a
manner prohibited by the Bylaws of the American Society.
Guide 2.3: A member shall encourage others to attain the Chartered Life Underwriter and/or the
Chartered Financial Consultant designations.
A. Enhancement of the public regard for the CLU and CHFC designations depends upon a
continuing increase in the number of holders of the designations who are available to advise
and serve the public.
B. Encouraging others who might be qualified to enter into a practice is one hallmark of a
Guide 2.4: A member shall avoid using the Chartered Life Underwriter or Chartered Financial
Consultant designation in a false or misleading manner
A. The CLU and CHFC designations are granted by the American College to specified
individuals. Acts which directly or indirectly extend the member's personal designation to others
would present a violation of this Guide.
B. Chartered Life Underwriter (CLU) or Chartered Financial Consultant (CHFC) may not be
used in a name of a business in a manner which would reasonably lead others to conclude that
someone other than the named member held the designation. For example:
• John Jones, CLU & Associates is permissible.
• John Jones & Associates, Chartered Financial Consultants is not permissible.
General Agents and Managers Association (GAMA)
The General Agents and Managers Association (GAMA) is an arm of the National Association of
Life Underwriters (NA-LU) devoted to issues involving general agents and agency managers.
Like the NALU, GAMA has its headquarters in Washington, DC. The GAMA Statement of
Principles codifies the ethical principles that general agents and agency managers should strive
The General Agents and Managers Association Of the National Association of Life
BECAUSE the institution of life insurance renders an economic and social service that is unique
and of great benefit to society, because it is a trusteeship that requires constant service, and
because matters that affect its progress are of vital concern to all, and because the
representatives of life insurance constitute its most important liaison with the public which it
serves; and because it is of the utmost importance to maintain the high ethical standards of the
institution of life insurance;
THEREFORE, I believe it to be my responsibility:
• To select my agents and managers carefully, using the best available techniques, so
that only the qualified shall be placed under contract.
• To build a sales organization by recruiting people new to the business who intend to
make life insurance, in one or more of its branches, their full-time career.
• To provide adequate training and supervision, using the best available methods and
materials, so that the agents placed under contract give sound advice, render quality
service to policyholders, and achieve financial success at the earliest possible moment.
• To encourage my associates to continue their development with sound self-improvement
programs from year to year, such as LUTC, CLU, and other similar courses, to the end
that they may reach the highest level of proficiency, and achieve prestige and maximum
satisfaction in their work.
• To encourage membership in and support the local Association of Life Underwriters by
attendance and participation in meetings and activities and to follow their rules of
• To present fairly and honestly, and without exaggeration, all facts which a prospective
agent or manager should have in determining whether to accept a contract with my
• To urge any agent or manager with whom I am discussing potential employment to
review the agent's or manager's current employment situation with the agent's present
general agent or manager before reaching a decision.
• To take a leadership role in advocacy of the agency distribution system and in the
fundamental belief that life and disability insurance are upon death, disability, old age
and during emergencies the best products to provide cash and income when most
needed by my fellow citizens who seek self-determination and personal freedom.
In general, I shall endeavor and encourage others to practice the "Golden Rule" in all aspects of
our professional lives and, in so doing, strive to gain the respect of our contemporaries and lift
our profession to the highest level of public esteem.
National Association of Health Underwriters (NAHU) Code of Ethics:
to hold the selling, service, and administration of health insurance and related products and
to respect my clients’ trust in me, and to never do anything that would betray their trust or
to give all service possible when service is needed;
to present policies factually and accurately, providing all information necessary for the issuance
of sound insurance coverage to the public I serve;
to use no advertising that I know may be false or misleading;
to consider the sale, service, and administration of health insurance and related products and
services as a career, to know and abide by the laws of any jurisdiction, federal and state, in
which I practice, and to seek constantly to increase my knowledge and improve my ability to
meet the needs of my clients;
to be fair and just to my competitors, and to engage in no practices which may reflect
unfavorably on my industry or myself;
to treat prospects, clients, and companies fairly by submitting applications that reveal all
available information pertinent to underwriting a policy, and
to extend honest and professional conduct to my clients, associates, fellow agents, and brokers,
and to the company or companies whose products I represent.
ETHICS AND THE INSURANCE INDUSTRY
Ethics and ethical behavior is important not only in the insurance industry but in all professions.
The truth is that most professions could not survive without it.
Ethics are the only element, other than legal mandates, that add an element of trust to many
industries. It is very difficult to mandate ethics. Only behavior may actually be mandated. If a
person is ethical, that is something within themselves that simply adds to their trustworthiness.
A businessperson who forms their business presentation on the basis of honesty and ethical
conduct will, over time, make a habit of presenting things in a certain manner. As time passes,
this business presentation will become routine with little variation. Eventually, the
businessperson may forget how they formed the original presentation, but if ethics were present
in the original presentation, they will continue to be as time goes by. This is also true of many
habits that people originally had to learn, but then became routine.
Many people believe that the primary cause for unethical behavior in the insurance industry is
the fact that most agents are paid by commission based on sales. They believe that commission
sales cause agents to feel that they must do whatever it takes to make the sale. But many other
businesses are based on commissions without receiving a negative image. Commission sales
are ethical as long as they are structured properly. The commission sale system is not the
problem but rather the people and companies that abuse the system.
Some people today feel that ethics and business cannot coexist, especially in the insurance
business. As long as these profits are achieved ethically, ethics and business definitely can
coexist. A goal of all businesses is to be profitable. Being successful is not unethical. It is
obviously vital for all businesses to be profitable to be successful. However, this success should
not alter the ethical standards within the company. Profits, commissions and ethics can all
While most companies do believe good ethics and good business go hand-in-hand, they don't
always acknowledge or reward ethical behavior with the same emphasis they reward high sales
Ethical behavior should be recognized and rewarded. This in turn leads to more ethical behavior
which ends up benefiting everyone, including the company. When the only behavior that is
rewarded is sales volume, employees will learn quickly to make a sale by any means.
Yet at the same time, the world admires financial success above almost everything else.
Though these two things are not opposites, striking a balance between them is not easy. But it
is necessary to do so in order to live up to the trust others have placed in them.
Statistics show that one out of every five employees in the insurance industry is aware of at
least one ethical violation over the past two years.
half reported witnessing unfair treatment of employees;
four in ten reported improper/personal use of company resources;
25% reported lying or intentionally misleading customers;
half reported lying on reports or falsifying records;
one out of two reported lying to supervisors, and
four in ten reported conflicts of interest.
Working in the insurance industry, people often model behavior that happens around them.
When their peers and people around them do not consider ethics important, they will eventually
lose site of ethics and its importance.
If company leaders don’t exhibit the behaviors and decisions of high integrity, the company’s
employees aren’t going to do the right thing. Leadership is critical to build an ethical
organization, but this doesn’t just apply to C.E.O.’s and Board members. Ethical leadership can
come from anyone. For an industry to make significant strides ethically each person,
individually, must commit to doing what is right. Not just in order to meet compliance
regulations, but because it is good business. More important, because it is the right thing to do.
The insurance industry is founded on ethics. It would be impossible for the industry to operate
without it. The insurance industry depends upon the consumer to act ethically when disclosing
personal information, it depends upon the agent to relay that information correctly to the
underwriters and it depends upon the insurer to keep their promises that appear in the
contracts. Even the claims that are submitted to the insurance companies depend on ethical
behavior. Many fraudulent claims are submitted each year, which drives up the costs for
insurance protection. Such fraudulent claims are certainly unethical. Ironically, many
Much is made of the poor image of the insurance industry. Consumers normally do not think of
insurance in a positive light. Here are some of the things that lead to such a poor reputation:
• Insurance companies driven by stockholder expectations rather than long-term goals.
• Poor communication about how the industry and its products are designed to work leads
• Lack of customer focus often leads to an adversarial position at a time the customer
needs the product the most.
• Unhealthy competition destroys the pricing integrity of the insurance product.
The field of insurance is an occupation where public expectation and opinion are extremely important to
everyone involved. Many people look to insurance to provide them with a sense of security and
assurance. When they buy insurance some people think, “Now I don’t have to worry; everything
will be taken care of.” Insurance is only a partial solution for the uncertainties that the world
presents. Many ethical concerns with insurance exist because of this gap between consumer
expectations and genuine insurable risk.
Probably one of the most disturbing practices, in which the insurance industry currently
engages, surrounds the pricing of the product. With pressure on both underwriters and agents
to develop additional business, what works in the short term may have disastrous effects in the
People are often disappointed, angry or disillusioned to find that the insurance they have been
paying for does not cover a particular situation. This can leave consumers feeling that insurance
is a “rip-off”. Not meeting a customer’s expectations can be frustrating and dissatisfying to both
the clients and the agent. Because of this difference between what people expect and what
insurance provides, insurance is one of the most highly regulated industries in the U.S. It is one
of the few industries that is primarily regulated at the state level with 51 different sets of laws
and regulations governing insurance (including the Disctrict of Columbia).
Insurance is an Essential Product – A Necessity
Insurance is a formalized way for people to come together and help each other. Insurance
allows us to take risks and live our lives to the fullest. Insurance is required in most industries
and professions providing some assurance of the quality of goods and services that people use.
Commercial insurance for industries and professions has underwriting standards that require
certain practices, safeguards, licensing, and so on. In this way, insurance provides a form of
safety net for consumers both in terms of the product or service delivered and remuneration if
there is malfeasance.
In society, both individuals and businesses depend on the insurance product to provide
essential services and protect them from financial disaster:
• Health insurance provides access to quality medical care.
• Life insurance proceeds support families, educate children, and assist in the
perpetuation of a business.
• Property coverage is an integral part of every mortgage contract.
• Some casualty policies (automobile and workers’ compensation, for example) are
required by law. In modern society, insurance has become a necessity.
people would have surgery, ride in an airplane, get on an elevator, eat in a restaurant,
drive cars, if there was no insurance in place. In many cases, without insurance they could not
enter into business. Without insurance one mistake could bankrupt a business and shatter
customer confidence. Insurance not only provides protection to the consumer, but also frees
people to conduct business.
Insurance alone cannot save a life, but it can pay for the medical treatment that will. Insurance
can help keep families together. It can permit a widowed mother to raise her children without
taking a job. It can replace the income of a disabled breadwinner, send a son or daughter to
college, or pay for quality medical and legal care.
Insurance cannot eliminate liability or prevent lawsuits, but it can protect the owners of homes,
automobiles, and businesses from the adverse effects of lawsuits. Without insurance it might
not be feasible to face the risks involved in owning a home, operating an auto, or running a
Insurance does not prevent property from being damaged or destroyed, but it can replace a
dwelling destroyed by fire or windstorm so that a family will have an adequate place in which to
live. It can, protect the individual, the family and the business from financial ruin.
These invaluable services rendered received by the public are in direct proportion to the
professionalism of the insurance people who deliver those services.
REWARDS OF ETHICS
For some, the very effort to be as ethical as possible brings its own rewards.
• The work of an insurance agent often impacts the entire financial well being and future of
businesses and families.
• Ethics place the interest of their clients above an agent's commission.
• Being ethical is being professional and goes beyond mere compliance with law.
o It means being completely honest concerning all facts.
o It means more than merely not telling lies because an incomplete answer can be
more deceptive than a lie.
o Instilling ethics is a process that must start long before a person chooses insurance as a career. It
is rooted in lessons parents teach their children.
Insurance agents and brokers must work hard to succeed, and occasionally, under the pressure
of competition, unfair or unethical conduct may occur. When an agent or broker does behave
unethically, it not only damages the reputation of that agent but, in the long run, the entire
It's unfortunate that unethical acts of a relatively few individuals cast a shadow on the vast
majority of agents, managers, and marketing support personnel who conduct themselves
according to the highest ethical standards. Where's the reward for being ethical? Here are few
• In the long term, ethical behavior usually pays off. One study found that people who scored
high on an ethics test tended to be more successful. People like dealing with individuals
whom they can trust.
• Unethical behavior hurts everyone. Unethical behavior costs agents in terms of higher errors
and omissions (E&O) coverage for protection against professional liability and a reduced
competitive position when product prices rise in response to increased company expenses
from paying liability claims to injured policyowners.
• The consequences of unethical behavior involve loss of one's job, personal disgrace,
perhaps even the loss of one's means of earning a livelihood, in addition to fines and civil
liability for monetary damages. Unethical people do get caught, so it's not worth the risk.
To ethical people, self-respect is more important than any reward someone else could offer.
Ethical people do the right thing just because it's the right thing to do.
The goals of ethics education is to create a win-win environment for all parties in the insurance
industry: companies and their employees, agents, policyowners, beneficiaries, the general
public, regulators, industry analysts, and consumer watchdogs.
THE ETHICAL PILLARS OF INSURANCE
Insurance Involves Trust. The basic insurance product is an uncertain promise that the insurer
may never be called upon to fulfill. The value of the promise is based on the trust of the
policyholder in the insurer. However, Gallup polls since 1977 have consistently ranked
insurance sales persons among the lowest in terms of perceived honesty and ethical standards.
Trust is an important factor in the purchase of insurance. Although modern insurance contracts
are easy-to-read, they are not easy-to-understand. Few insureds read their policies and those
who do, seldom understand what they are reading. Most people buy their coverage based on
trust. They trust the agent to recommend and procure appropriate coverage. They trust the
insurance company to pay claims. It is imperative that individuals, working in the insurance
industry, maintain a high ethical standard.
Insurance is a complex product. Consumers are generally not in a position to evaluate their
own needs and choose an appropriate solution. In the insurance business the value that the
customer should receive includes not only the benefits of the product itself, but also the best
efforts of the agent to assure that the product meets the customer's needs. Customers depend
on the agent's specialized knowledge and skills, and agents shouldn't take unfair advantage of
Agents are the trusted advisors when it comes to insurance and financial matters.
Consequently, they have an individual and collective responsibility to always look out for their
clients’ best interests, share their good fortune, and offer their expertise within the communities
Many professions deal with knowledge that the average person simply does not have.
Insurance is one of those professions. As a result, those individuals who seek out the
professionals must rely upon their honesty and integrity. The potential for abuse of power and
knowledge led to the development of sets of rules which are often called ethical standards.
Sometimes, these ethics are written standards, which may be mandated by law on either a local
or federal level. The premise upon which these laws and ethics must be based, is that power
must be exercised in the interest of the clients who seek the professionals out and may not be
exercised solely in the best interest of the professionals themselves.
The agent is a person in whom the client places a great trust and confidence. It is this potential
abuse of power that ethics are designed to prevent or limit. The limitations and restrictions on
the agent must not be so great as to be so unenforceable, unrealistic, and impractical as to
prevent the agent from performing their duties to the client.
Clients must reveal a great deal about themselves to their insurance agent, everything from the
state of their health to what their financial worth actually is. Insurance agents know more about
their clients than do many of their friends, and trust is essential for the relationship to work.
The field of insurance is about money. No matter what is being insured, ultimately, what is being
protected is the monetary value of assets, whether that asset is someone's home, their
automobile, their jewelry, or their life.
Agents handle money, and this is an important responsibility. But beyond this, their work often
has an impact on the entire financial future of individuals, businesses, families and sometimes
even communities. There are numerous other situations where the work of an insurance agent
plays an important, though often unrecognized, role.
All business transactions are based to a certain extent on trust. People don't like to have their
trust violated. Businesses become successful by providing value and taking care of their
customers. That's especially true in the insurance business. The success of the insurance
industry depends on individuals who are both knowledgeable and ethical. People want to do
business with someone whose integrity is unquestioned.
If a travel agent does not do a professional job planning a vacation, she may ruin a week of their
client’s life. If an insurance agent does not do a professional job, their client’s may never recover
financially. Insurance is the very foundation of a sound financial plan. Inadequate or
inappropriate insurance products can have significant impact on an individual, a family, a
business, and a whole nation.
There's much more at stake with an insurance policy compared to most purchases. If the policy
doesn't deliver on its promises, policyholder’s surviving loved ones will suffer financially. In
addition, a tangible product like a car can be physically inspected, but with an intangible product
like a life insurance policy, a consumer is buying a promise that may not need to be fulfilled for
years in the future. It takes a lot of trust to trade today's dollars for that kind of product.
Many people cannot see the relationship between the premiums they pay and what they get out
of it. Because insurance pays only when things go wrong, it is possible to pay thousands of
dollars of insurance premuim and only receive minimal benefits back. It is only human nature to
Loyalty is at the basis of a trusting relationship between a principal and an agent. Loyalty means
adhering strictly to the lines of authority the principal has given the agent, and acting with
absolute integrity in carrying out the principal’s business. Loyalty precludes agents acting in
concert with agents from competing principals to take business away from a principal. And,
unless an agent has specific authority to represent more than one company, he or she may not
do so. (Independent agents and brokers of course represent several companies, with the full
knowledge of all involved.) The agency contract sets limits within which an ethical agent stays.
Professional insurance agents act in good faith and with integrity in their dealings with the
insurer. Agents also have an obligation to follow their insurers’ lawful and reasonable
instructions. Because of the litigious environment, especially where the deep pockets of
insurance companies are concerned, this obligation is particularly important. Partly in reaction
to this environment, many insurers are providing thorough instructions about the solicitation of
business and the type of advertising and sales materials that agents can use.
Instructions like these are designed both to limit the insurer’s liability and provide a minimum
standard against which agents’ conduct may be measured. Agents who choose to ignore the
instructions from their insurers may find their contracts terminated, and they may find
themselves facing lawsuits from their insurers as well as from their clients.
Trust and confidence are essential in an agent's relationship with clients. The quality of the
relationship between the principal (insurance company) and the agent can have a definite effect on
ETHICS FOR INSURANCE PRODUCERS
The issues that can present some ethical concerns for insurance producers can be broadly
classified into one of the following three areas:
• skill and competence issues;
• obligations associated with a commitment to, or lack of, professionalism; and
• moral issues stemming from individual behavior.
High ethical standards are important in the agency of today, and, fortunately, most insurance
agencies meet the challenge. Insurance agencies at attracting and retaining significant numbers
of quality, educated individuals who are committed to making the insurance product work for
While agencies attract individuals with comparatively high ethical standards, the ethics of those
individuals is challenged, on a daily basis, by both the insurance industry and the individual
clients the agency serves.
TYPES OF INSURANCE PRODUCERS
Insurance agents, brokers, and solicitors (also known as producers in some states) are not only
categorized by their function in the industry, but also by the line(s) of insurance they are
licensed to sell.
Life and Health Agents
Life and health agents represent the insurer to the buyer with respect to the sale of life and
health insurance products. The agents are appointed by the insurer and usually the agent's
authority to represent the insurer is specified in the agency agreement between them. Life and
health insurance agents generally do not have the authority to issue or modify insurance
contracts, but are authorized to solicit, receive, and forward applications for the contracts written
by their companies.
The agent may collect the first premium due with the application, but usually not subsequent
premiums (except for industrial life insurance). The insurance company approves and issues
the contract after receiving the application and premium from the applicant through the agent.
The agent cannot bind coverage. This means that a life and health agent cannot commit to
providing insurance coverage on behalf of the insurance company (bind coverage).
Property and Casualty Agents
Producers in the property-casualty field may be one of two types: (1) agents who have authority
to bind the companies they represent; or (2) who cannot bind coverage or issue policies
because they do not represent insurance companies. Some states also have licenses for
solicitors or limited agents who must usually work under the authority of a licensed agent or
Property and casualty agents are appointed by property and liability insurance companies, and
generally have more authority. These agents may bind or commit their companies by oral or
written agreement. A binder is a temporary contract, usually providing coverage for a short
period of time (commonly 15 to 30 days, depending on the state). Binders may be used to
provide written evidence of coverage before a policy has been received, or to provide temporary
coverage pending the issuance of a policy. Coverage under a binder usually ends when
coverage begins under a policy. To avoid any dispute, the agent who gives an oral binder
should immediately record the effective date of coverage, the terms of coverage, and the names
of the parties (insurer and insured). Property/casualty agents also sometimes inspect risks for
the insurance company and collect premiums due, and may be authorized to issue some types
of insurance contracts from their own offices.
Agents vs. Brokers
It is difficult for most insureds to tell the difference between an insurance agent and an
insurance broker. Basically, an agent acts under specific and delegated authority from the
insurer while a broker acts on behalf of the insured.
Unlike an agent who represents an insurance company, an insurance broker legally represents
the insured. A broker acts as an independent contractor and does not have the authority to bind
the insurer. In some cases, brokers are also licensed as agents and they then have the
authority to bind their companies as agents. A broker may attempt to place business with more
than one company and has no exclusive contract requiring that his or her business first be
offered to a single company. A broker is paid commissions by the insurers where the business
is placed. Legally, a broker obtains insurance for anyone who requests him or her to do so and
represents the customer. For this reason, the insurance broker is an agent of the applicant.
An insurance agent is someone who solicits insurance or who aids in the placing of risks,
delivery of policies or collection of premiums on behalf of an insurance company. The acts of
agents are binding upon the company only to the extent specified in their contracts or that they
are otherwise authorized to do so. Agents cannot delegate their rights or powers unless
expressly authorized. Agents act in a fiduciary capacity and occupy a position of special trust
and confidence in handling or supervising the affairs or funds of another.
In contrast to the agent-client relationship in which the agent represents the insurer to the
purchaser, a broker represents the buyer to the insurer. A broker may do business with several
different insurers. Brokers are independent sales representatives who select insurance
coverages from various companies for their clients.
Brokers must be licensed and their routine activities and functions are similar to that of agents.
Brokers solicit applications for insurance, may collect the initial premium, and deliver policies. In
general, brokers do not have the authority to bind coverages.
A broker's primary responsibility is to his or her client. Brokers serve their clients by finding the
appropriate insurance coverages to meet the clients' needs. Because the business of insurance
requires honesty and good faith, the broker is prohibited from engaging in any marketing
practice that involves unfair competition or a deceptive act. Like agents, in most states brokers
are required to take continuing education (CE) to remain knowledgeable and current in areas
that pertain to insurance principles, coverages, laws and regulations in order to retain their
A solicitor is a salesperson who works for an agent or a broker, most commonly in the property
and casualty insurance field. Depending on the state, the solicitor may be required to obtain an
agent's or broker's license, or may hold a special solicitor's license. Solicitors normally have a
working agreement with a single agent or broker specifying that the solicitor's primary functions
are to solicit insurance, collect initial premiums and deliver policies. Solicitors cannot usually
Insurance Consultant or Analyst
A relatively small group of insurance professionals are licensed as insurance consultants or
analysts. Generally they are not paid by commission for the sales of insurance policies.
Instead, they work strictly for the benefit of insureds and are paid a fee by the insureds they
represent. In most states, it is illegal to charge a fee and represent oneself as a consultant,
analyst, advisor or other similar title without holding the proper license.
Excess or Surplus Lines Brokers (E & S Bokers)
An Excess or Surplus lines broker is a person licensed to place coverage not available in his or
her state (or not available in a sufficient amount) through insurers not licensed to do business in
the state where the broker operates (non admitted insurers). These individuals specialize in
lines that are difficult to write, such as those that tend to have a high loss frequency or severity
potential that would strain the abilities of ordinary markets. In some cases, brokers dealing with
these hard-to-place risks will use markets such as Lloyd's of London. In other cases, coverage
may be placed with nonadmitted insurers. Most states require excess or surplus lines carriers
to be specially licensed.
General Agents and Managing General Agents
An agent who hires, trains and supervises other career agents within a specific geographical
area, is referred to as a general agent (GA) or managing general agent (MGA) - The MGA is
compensated by commissions earned on business he or she sells as well as overrides on the
business produced by the other agents managed by the general agent. An MGA may receive
additional compensation for administrative and service functions performed for policyholders.
The extent of any agency relationship between the agent and insurer beyond collecting the
premium and delivery the policy is governed only specific agency agreement or binding
Exclusive vs. Multiple-Company Representation
Whether an individual represents one insurer or works with a number of insurers; the ethics and
fiduciary standards are virtually identical.
The contract an agent has with his or her company may require the agent to give the company
"first right of refusal" on all of the agent's business. If the company does not wish to insure a
particular applicant, the agent may then be free to submit the business to another company.
This is known as “exclusive representation."
For many years, exclusive representation was the norm in the life insurance industry and to a
large extent it still is, especially for new agents. However, multiple-company representation is
more common than it used to be. Agents may become licensed to represent more than one
company in order to offer a wider range of products to their prospects and clients.
Multiple-company representation is not necessarily unethical in itself, except when the agent
has a contract with a company that calls for exclusive representation. However, even when an
agent is not contractually bound to one company, multiple-company representation gives rise to
some ethical issues.
Multiple-company representation also creates questions about who is responsible for an agent's
activities. If an agent represents one company exclusively, the party to whom liability will be
imputed is clear. The situation is not at all clear when an agent represents more than one
From the agent's point of view, whether agents represent one company or many, they have an
ethical obligation not to take any action that might impute liability to any company they
represent. Agents serve their own best interests in avoiding liability for their companies, since
they become liable to their companies for any damages that they cause.
Property and casualty insurance is marketed by independent agents, exclusive or captive
agents, and brokers. Exclusive agents sometimes offer insurance from their insurer at a lower
cost, due to lower commissions and reduced expenses resulting from centralization of
underwriting, policy issuance and claims processing in the direct-writing system. Independent
agents and brokers offer insurance consumers the most options, because they work with
multiple insurers. The agents have an wider choice of coverages, prices and services for their
policyholders. Historically, independent agents have been the predominant producers in the
Independent agents, who typically represent a number of companies, also face a conflict of
interest when they serve their clients. Independent agents are independent businesspeople
who own the renewals and are compensated by commission (or fees) as opposed to being
salaried only or salaried/commissioned employees of an insurance company. Independent
insurance agents sell their clients the policy that fits their needs best among the many insurers
they represent, and are paid a commission for each sale. The independent agent owns the
expirations of the policies he or she sells, meaning that that agent may place that business with
homeowners policies with a particular insurer each month. To assure that this quota is met, the
agent may be tempted to only offer new clients a quotation from that company rather than
"shopping" around with several companies. In some cases, the client might be better served by
another insurance company that offers more or different coverages.
Although the agent represents the insurer, he or she must also attempt to serve each client by
providing the best coverage at the most competitive premium. The agent may feel torn between
serving the insurance company and the client because generally an agent cannot act as an
agent for both parties in a transaction. Conflicts can be avoided if the independent agent
follows the guidelines that apply to dual-agency:
• The agent represents the insurance company when insurance is being applied for and when
it is in the process of being underwritten, in recordkeeping, in claims settlement or other
• The agent represents his or her client only during the process of helping the client select the
insurance plan best suited to the client's needs. It is up to the agent to see that the policy is
written properly so that coverage applies where and when needed.
Many agents belong to a marketing system known as the Independent Agency System. The
independent agent may represent any number of insurance companies under contractual
agreement and is compensated on a commission or fee basis for the business produced. They
are independent businesspeople who represent several insurance companies, pay all their own
agency expenses and make all decisions about how their agency operates.
Independent agents legally represent the insurance company (or companies), but as a practical
matter they also represent the insurance consumer. Agents operating under this system have
considerable bargaining strength with the insurers they represent because they may write
policies with whichever company offers the most appropriate coverage for the consumer.
Because the property and casualty business is highly competitive, insurers are often willing to
negotiate rates and commissions to obtain favorable business.
Exclusive or Captive Agents
Exclusive or captive agents represent one insurance company or one group of companies only.
These agents are paid a salary, commission or a combination of both. Under restrictions
imposed by the insurer, the insured is considered to be the company's client rather than the
agent's. Companies using captive agents own and control the account, policy records and
renewals. If the agency relationship or employment of a captive agent terminates, the agent
loses all rights and interest in the renewal business and related commissions.
These agents are sometimes referred to as career agents. Most often, these captive or career
agents are compensated by commissions. New agents may also be paid a training allowance
for several months which serves as a salary for a limited period of time during which the new
agent is being trained. Most companies will require that the career agent validate this training
allowance by producing a certain amount of new business each month.
consultant to a local business should inform his or her company of this activity. The insurer can
then determine if there is a conflict of interest.
A direct writer is an insurance company that sells its policies through employees or agents who
are employees. These agents usually receive a salary, or a salary plus commission for the
business they produce. Some insurers, such as specialty fire insurance companies that
emphasize loss prevention in insuring large, well-established industrial and institutional
properties, negotiate their contracts primarily through salaried representatives in direct contact
with executives of the business being insured. More commonly, however, policies are solicited
and sold through the mail. A direct writer maintains complete control and ownership of its
policies and renewals and no ownership rights exists for the agent.
AN AGENT'S DUTIES AND RESPONSIBILITIES
Insurance agents must fulfill certain duties toward their prospects and clients, and also toward
the companies they represent.
Insurance is a contract of "utmost good faith" between an insurance company and an insured.
The parties involved in the contract must deal with one another honestly and fairly.
As representatives of insurance companies through agency contracts, agents may be granted
wide authority to inspect risks, to immediately bind an insurer by oral or written agreement, to
issue various types of contracts, to collect premiums due, to settle some claims and so on.
Consequently, the agent is obligated to do the best job possible for the insurer and the client. If
the agent makes improper promises or representations that induce the client to act on those
representations, the agent may be held liable to either the client or the insurer, or both, for any
damages that result.
Agents’ ethical duties to the public and their prospects are quite demanding. In addition to the
attributes that most consumers expect from their agents, skill, competence, professionalism and
moral integrity, there are other ways in which agents can impact the public's perception of
insurance and the insurance industry.
Insurance agent represent their insurer to the general public and prospective insureds. Their
actions help shape the public's perceptions of the insurance industry. The agent’s primary
ethical duty to the public and each prospective insured is to provide accurate information
regarding insurance policies and benefits in a fair and unbiased manner. That information
should be complete in every way, providing the prospect with the details of any policy
deductibles, conditions, limitations, exclusions or requirements. An audit of a prospect's or
client's current insurance policies should be done to determine if they are up to date and in
A prospect's lack of understanding of precisely what an insurance policy will and will not provide
is usually the result of poor communication. Sometimes this problem occurs when an agent
attempts to sell a new product without fully understanding the policy's features and benefits.
Attempting to sell a policy, or without adequate knowledge and training is unethical since it is an
agent's responsibility to determine if and how a policy will fit the prospect's needs.
Understanding policies help the agent determine that the insured’s needs are met and also help
the agent compare them accurately to those of the competition.
CONFLICTS OF INTEREST
An area of disclosure that particularly affects insurance agents, registered investment
representatives (RIA, and others who perform financial planning services is conflict of interest.
Agents in the insurance and financial services industry have an obligation to identify and
disclose any conflicts of interest. Implementing a financial plan often calls for the prospect or
client to purchase securities and/or insurance. Those who sell and also receive commissions as
a result of selling these products must disclose that:
• They have an inherent conflict of interest
• The prospect or client is not required to purchase the recommended products through
the agent or broker making the recommendation.
A conflict of interest can best be described as a situation where the agent is representing or
advising “clients” who have opposing needs, goals, or interests. The term “clients” may refer to
customers, companies represented, the company they work for, the associations or companies
they advise (as a board member or committee member), and even themselves.
Conflicts of interest can occur in a variety of forms. The first and sometimes most difficult step in
avoiding the problems inherent with a conflict of interest is to recognize the conflict when it first
The potential for conflicts of interest is something that insurance agents face every day. By
definition, agents are charged with the responsibility of representing the interests of others.
Inherent in this role is the possibility for conflicts of interest. In order to maintain the ethical
reputation and the integrity of their industry agents should follow these steps. First learn to
recognize the conflict when it appears, second disclose the conflict to the people involved, and
finally resolve the conflict immediately.
Sales professionals will have a conflict of interest whenever their interests and those of their
clients are opposed. It may not always be apparent that a conflict of interest exists, but
professional sales people in the insurance or investment business are ethically obligated to
uncover any such conflicts.
Insurance agents face numerous situations that may involve a conflict of interest. If agents
conduct themselves properly in these situations, they will earn the trust of their clients, which in
An inherent conflict of interest arises in the case of any person who, for a fee, is expected to
provide an objective, unbiased financial plan for the client, while also offering financial products
for sale. If the financial planner also sells insurance and/or investment products whom the client
may use to implement the financial plan, a conflict of interest exists. The conflict of interest
results from the sales person’s interest being the sale of a product, a status that may affect the
unbiased nature of the financial planning recommendation.
Sales professionals finding themselves in such a conflict ethically have two options for dealing
• They may refuse to make any client recommendations and suggest that the client seek
• They can fully disclose the nature and extent of their conflict to the client and allow the
client to decide whether or not to work with them
A conflict of interest arises in any situation where an agent’s self-interest competes with the duty
that one has assumed to act in the best interests of another. Conflicts of interest involve the
danger that individuals may violate their ethical duties toward others.
When a situation clearly involves a conflict of interest, the agent is required to set aside his or
her self-interest and act in the best interests of the prospect.
There is a conflict of interest intrinsic to the agent-consumer transaction. While agents should
make recommendations based on the client's needs, they need to sell results in order to earn
commissions and make a living. The pressure to sell emanates from the agent's own personal
financial situation and of course, the agent's company and manager. The insurer may say it
wants the sales force to provide a careful needs analysis but, in fact, the reward system for the
agents is usually based on sales - not service. If an agent discovers that less service and
needs analysis can result in quicker sales, then the agent faces the ethical conflict of whether to
make more sales and more money at the expense of the clients' needs.
Employees and agents should avoid actual or apparent conflicts of interest - that is, a personal
interest outside the company which could be placed ahead of the individual's obligation to the
insurer. For example, most insurers will prohibit any employee or agent from serving as a
director, officer, partner, or trustee in any outside business enterprise. An exception to this
could be a family-held business.
The insurance sales transaction involves a potential conflict of interest. In the short-term, the
benefit to the agent is maximized by selling, in the least amount of time, the largest possible
amount of the product that pays the highest commission.
THE AGENT AS A FIDUCIARY
DEFINITION OF FIDUCIARY
A fiduciary is an individual whose position and responsibilities involve a high degree of trust and
confidence. A fiduciary is "A person who stands in a special relation of trust, confidence, or responsibility in
have a fiduciary responsibility to the insurer they represent. Agents also have a fiduciary
responsibility to their clients.
An insurer places a great deal of trust and confidence in its agents; consequently, an agent
must act in the best interests of the insurer.
The agent is the intermediary between the company he or she represents and the client. Most
clients do not know a great deal about the particular company represented, and may have little idea
of what insurance companies do, or how they operate. One of the duties of an insurance agent is to make
certain that the client is familiar with the particular insurance company's record for financial stability and payment
Serving in a fiduciary capacity demands high ethical standards and performance. In fact,
fiduciaries are held to a higher standard of conduct than is required in the usual course of
Clients are much more interested in the performance of the company who insures them and their own
property than with an agent's personal charm. They appreciate a climate of trust in which they can
ask questions about what they don't understand.
Another reason an insurance agent must understand the fiduciary nature of his or her
responsibility to clients. Insurance is about money, value, and worth. It is a way of paying for
the loss of something before that loss occurs. And when clients purchase a policy, they are
concerned, primarily, with three things:
• The value of the thing to be insured
• The cost to insure it
• The benefit if a loss occurs
When going over the policy, agents should concentrate on those three things. Agents must also
be sure that clients understand their responsibilities such as paying the premium on time,
updating coverage amounts when circumstances change and their duties in the event of a
A client depends upon the agent to sell him or her a policy that will meet the client's needs
within the limitations of what the client can afford to pay. Making sure the client understands
how the policy works, avoids trouble later.
The courts fully realize that an insurance contract is a product of a fiduciary relationship, one in
which trust and confidence are paramount.
Through his or her appointment, an insurance agent is generally given the power and express
authority to act for the insurer by:
• soliciting applications for coverage;
• describing coverages and policies to prospects and applicants and explaining how such
• collecting premiums (or in some cases, only initial premiums with subsequent billings
being issued and sent by the insurance company); and
• providing service to prospects and the insurer's policyholders.
Thus, while the provisions of the agency contract tell agents what acts they are authorized to
make, how they go about those tasks is usually left to their own judgment and discretion.
However, both an agent's actions and judgments are held to fiduciary standards.
An agent has a duty to carry out his or her actions with the utmost care and skill. The fiduciary
relationship is a special relationship of trust and confidence that requires a high degree of care
and integrity. As the insurer's authorized agent, the agent represents the company to the public
and must act accordingly. In some cases, this means the agent must refer the business to
others who are more qualified if the agent does not have the skills to handle it.
Provide Information and Follow-up
An agent has the obligation to act promptly in all matters regarding the insurer's business,
including the responsibility to transmit completed applications and notice of bound coverages as
quickly as possible. The insurer cannot begin the process of underwriting and issuing insurance
until it has received an application and, unless the applicant has been given a binder, he or she
remains at risk until a policy is issued. On the other hand, if an applicant is given a binder at the
time of application, the insurer is obligated to provide coverage, until and unless the application
is formally rejected. In either event, a delay by the agent in turning over an application may
place the applicant or the insurer in jeopardy.
Acting As a Trustee
Agents are sometimes asked by their clients to act as trustee of a life insurance trustor a
qualified plan. However, if the agent has sold or is going to sell policies to fund the trust,
accepting the role of a trustee may put the agent in a conflict of interest that is prohibited by law.
If an agent has sold or will sell a policy to a trust or plan, he or she should not accept any other
role in relation to the trust. If an agent has assumed a role as trustee or adviser to a trust, he or
she should not sell a policy to the trust.
A trustee is a fiduciary, which means that he or she is obligated by law to act solely in the best
interests of another party, in this case the beneficiaies of the trust. Under the law, a trustee who
accepts any bonus or commission for any act performed by him or her in connection with the
administration of the trust, has violated his or her fiduciary duties.
From a legal standpoint, an agent can choose to act either as an agent, or as a trustee, but not
both. This conflict of interest must simply be avoided.
Consequences of a Breach of Responsibility to Clients
There are also legal consequences for unethical conduct, which can include suspension or
revocation of the agent's license, as well as lawsuits in criminal or civil court. Agents can, by their unethical and
illegal behavior, put themselves in jeopardy with the law.
PROVIDING SERVICE TO CLIENTS
Selling to needs is only part of what an agent must do to meet the ethical responsibilities he or
she owes to a policyowner. Service, during and after the sale, is just as important.
In all instances, the agent is responsible for:
• maintaining accurate records about his or her clients
• maintaining complete and accurate written records of all business transactions
• keeping informed about changes in markets, new coverages and products availability
that might expand coverage for a client or provide potential for additional sales to
prospects or clients;
• assisting clients with their service needs, such as changes on policies, premium
• assisting clients in filing claims and by following up on the status of open claims; and
• contacting clients before renewal dates to: (1) review existing policies and their values
and limits in light of any changes in exposures and needs that may have occurred; and
(2) recommend suitable changes in coverage as necessary.
Lapsed Policies Are Costly
Lapsed policies are costly to the agent, but even more so to the insurer. Some agents write
policies they are fairly certain will lapse in order to make their monthly sales total look good. The
insurance company's administrative costs can be heavy indeed. Such costs include handling
the applications, the underwriting process, issuing the policies, and tracking them through the
period when no premiums are paid and the policies lapse. Of course in some cases claims are
submitted during this short period further adding to the cost to the insurer without the usual
number of policy premiums to balance out the claim cost.
• The final responsibility an agent has to a client is to service the policy with periodic
reviews, and to keep clients informed of any changes in insurance instruments or in
insurance laws/regulations that affect the coverage.
Things are continually changing in insurance financial services. The client's situation is also
changing. As time passes, people develop different financial needs. Marriage, divorce, children
born, and children moving out on their own are just a few of the life changes that clients may
experience, all of which may have a substantial impact on their financial needs.
An agent assumes a duty to meet a client's financial needs not just at a single point in time, but
also good business and creates the opportunity for additional sales. Periodic reviews of a
client's coverage may reveal a need for additional coverage In addition, the agent will be
rewarded through referrals obtained from that satisfied client, and by the renewal of that policy
over the lifetime of the insured.
Some agents incorrectly assume that the life insurance sales process is completed when the
decision to purchase the policy is made. The policy is stuck in a drawer and never consulted
again. Agents and their clients must understand that changing circumstances require
modifications and adjustments to the life insurance policy over time.
The client may need or be able to afford more coverage, his or her protection goals may
change, interest rates and values may not be performing as projected; all require ongoing
monitoring and reconsideration. Current life insurance commission structures do not support
that level of continuing customer service.
First year commissions in life insurance are higher than renewal commission in recognition of
the sometimes lengthy application process. These higher commissions in life insurance sales
also are intended to help new agents survive the early, difficult years in the business and give
them the incentive to prospect for new business.
AGENCY LAW PRINCIPLES -- THE CONCEPT OF AGENCY
An understanding of the law of agency is important because an insurance company, like many
other companies, most often acts through agents. Agency is a relationship in which one person
is authorized to represent and act for another person or for a corporation. An agent is a person
authorized to act on behalf of another person, who is called the principal. An insurer appoints
licensed insurance agents to represent its interest to the insurance buying public. Insurance
agents, acting for the insurer, establish insurance contracts with the general public on behalf of
In the insurance field, the insurer (the principal) authorizes agents to carry out certain activities which are then
legally binding upon the principal. All of these activities are centered around the insurance contract,
or policy through which all or part of an insured's risk of loss is transferred to the insurer in
return for a set premium.
The agent's actions are considered by law to be those of the principal when the agent is acting
within the scope of his or her authority. Both the principal and the agent may be individuals,
corporations or partnerships. Since an insurance agent acts for the insurer/principal, in the minds
of clients the insurance agent often becomes the company, since their only contact is with the agent. The agent
has a serious ethical responsibility to do nothing which will cause harm to the principal.
The insurer is always held accountable, at least financially, for the actions of its agents; to what
extent the insurer is held accountable differs from state to state. It is in the insurer's own best
interest to develop, communicate, and enforce clear compliance directives for its field force, to
provide adequate agent support and training, to provide fair advertising materials, and
insurance company and the producer is the agent. Once empowered to act as an agent for a
principal, the agent is legally assumed to be the principal in matters covered by the grant of
• Contracts made by the agent are the contracts of the principal.
• Payment to the agent, within the scope of his or her authority, is payment to the
• The knowledge of the agent is assumed to be the knowledge of the principal.
The relationship between an insurance agent and his or her company is governed by the
concept of agency. "Agency" is a legal term that describes the relationship between two parties,
in which one party-the principal-has authorized the second party-the agent-to perform certain
legally binding acts on the principal's behalf. A principal may authorize an agent to do anything
the principal might have done for its own benefit.
By appointing others to act for it, the company is entrusting its agents to carry out its business
and meet its goals and objectives.
• An agent is an agent of the principal, not the third party with whom he or she deals.
• An agent has the power to bind a principal to a legal contract and its obligations.
• By law, the acts of an agent, within the scope of his or her authority, are the acts of the
THE THREE TYPES OF AGENCY
There are three ways to form an agent/principal relationship:
Agency by Appointment
When a principal and an agent wish to enter into an agreement to create, modify or terminate
contractual relations with a third party, they usually enter into an explicit contract for that
purpose. In most cases, the contract will be in writing, but it is not always legally necessary to
do so. A contract, usually written, defines the specific authority the principal gives to the agent to use on its
behalf. This is the usual way in which agency is created.
Agency by Estoppel
In some cases, an agency relationship may be created without an express agency contract.
Although an individual or legal entity acting on behalf of a principal does not in fact have the
legal authority to do so, the principal has allowed a situation to develop in which innocent third
parties assume the agent does in fact have proper authority and enters into a contract with the principal. The
principal may then legally be estopped (barred) from claiming that the agency did not in fact
In order for agency by estoppel to exist, three things are required. First, the principal must act in
some way to create the appearance that an agency relationship exists. Second, an innocent
third party must have been misled by the principal's actions and made to believe that an agency
relationship exists. Finally, the innocent third party may be injured by acting in the belief that an
agency relationship exists.
Agency by Ratification
Agency may also be created by ratification. This describes a situation in which someone acts as
though he or she has a principal's authority to act on its behalf, when actually no such authority exists. But if
such an individual performs an act that is seen as beneficial to the principal, the principal may
ratify that act, and the presumed authority behind it. Basically, ratification results when the
principal later formally sanctions the previously unauthorized actions of an agent.
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
AUTHORITY OF AN AGENT
The concept of agency is the basis for understanding the contractual relationship an insurance
agent has with his or her company. Obviously, the ethical significance is that an agent must,
first and foremost, serve the insurer, live up to the contract and operate within the scope of his
or her authority. But actually, an agent's duty to the insurer goes far beyond the wording of the
contract. By entering into this contractual relationship, an agent has also entered into a
The concept of authority is related to the concept of power. Before an individual can act as an
agent and establish contracts between the principal and third parties, he or she must have the
power to do so. In the case of an insurer and an agent, this power is granted through an
agency contract. Naturally, there are limitations on an agent's authority.
When agents act within the scope of their authority, the acts of the agent are considered to be
the acts of the principal. Under certain circumstances, companies can be held liable for illegal
or other unauthorized actions taken by an agent. However, such agents in turn become liable to
their companies for the monetary damages they have caused.
If an agent's unauthorized actions end up costing the company money, the agent can be liable
to the company for the amount of the loss. For this reason, it is in both the company's and the
agent's best interests if agents are careful not to take any actions that would impute liability to
From a legal standpoint, agents are considered to have three types of powers. The agent has
• Apparent authority
Express authority refers to those particular actions the agent can and cannot perform for the
principal. Agents are given expressed powers in a written agency contract and in written
underwriting instructions from the company. These expressed powers specifically authorize
certain actions on the part of the agent.
Insurance agents normally have the express authority to solicit applications; describe various
coverage/policies to clients; discuss the process by which coverage is purchased; collect
premiums and service policies once placed.
Some agency agreements give the agent express authority to:
• Issue policies
• Cancel policies
• Retain a commission from the premiums collected
It is very important for an agent to know the limitations of their agency contract and to operate
within those limits. To do otherwise could place the agent in a position of personal liability. The
agent must be alert to the consequences on the insurance company, of his or her actions and
Implied authority refers to actions that are associated with the actions expressly authorized.
These powers are implied by the requirements of their agency contract, though these implied
powers are not specifically expressed or written.
Implied authority refers to actions which are associated with the actions expressly authorized.
To show that an action was taken by the agent under implied authority, the agent must show
that the act they performed was directly related to, and necessary because of, an act that they
are expressly authorized to do by the insurer.
Apparent authority is the authority the agent seems to have because of certain actions
undertaken on his or her part. This action may mislead applicants or insureds, causing them to
believe the agent has authority which he or she does not, in fact, have. An insured may rely on
powers the agent seems to have, although those powers are actually outside the scope of the
agent's expressed or implied authority. The principal may add to this assumption by acting in a
manner that reinforces the impression of authority. In such cases, the company may be bound
by the acts of its agent, but the agent becomes liable to the company for the losses the
company suffers as a result of those acts.
If a company supplies an individual with forms and other materials (known as signs and
evidences of authority) that make it appear that he or she is an agent of the company, a court
will likely hold that a presumption of agency exists. The company is then bound by the acts of
this individual whether or not he or she has been given this authority.
Limitations on Authority
Naturally, there are limitations on an agent’s authority. Rarely is an agent's authority to act for a
principal unlimited. In most agency relationships, an agent's activity is restricted to some extent.
For example, while an insurance agent is authorized to solicit applications and may even bind
coverage in some cases, the final decision to accept or reject the risk lies with the insurance
In addition, an insurance agent cannot modify a contract or waive exclusions, unless that
authority is granted under the terms of his or her agency contract, and most state laws specify
that this is a “nondelagable duty,” something that only the insurance company can legally do,
and only in writing.
An insurance agent also cannot adjust premium rates. This act is reserved for the company.
Typically, the limits to an agent's authority are spelled out in the agency contract, and it is within
those limits that an agent must act.
Negative Perception of the Insurance Industry
The insurance industry has suffered many image problems, some deserved and some
undeserved. In public opinion polls, insurance agents routinely end up at the bottom of the list.
Consumers do not feel that insurance companies and their representatives consider ethics to be
a high priority. Many consumers feel that ethical behavior in the insurance industry only exists
because, and to the extent, that, the states mandate it.
The unethical and misleading sales practices by some of the largest insurance companies and
brokerage houses has significantly affected the public image of the insurance and investment
For decades, the insurance industry was one of the most trusted financial institutions in the
nation. In the 1930s and 1940s, the public's confidence in the securities industry was shaken
by the stock market crash of 1929 and the long depression that followed. During that same
period, many people lost their life savings when a number of banks and savings and loans
folded. Yet insurance companies remained financially sound.
Offering that kind of stability and service has enabled the insurance industry to enjoy
tremendous growth. Whether the insurance industry can maintain that rate of growth will
depend to a large extent on whether it continues to earn the public's trust. In that regard
continued adherence to the highest ethical standards is essential.
When insurance policyowners are asked about their own agent, most say that he or she is more
interested in providing service than making money. However, when asked about insurance
This difference in perception may have something to do with the nature of ethics. Ethical values
are expressed in absolute terms. To be considered truthful, for example, a person must never
lie. Even if a person lies only once, it casts tremendous doubt on the truth of all of that
The same principle holds for groups of people, such as insurance agents and other marketing
personnel. A relatively few individuals who act with little regard to ethics can damage the
reputation of the entire sales force of the insurance industry. That's how important each
individual agent's actions are to the public perception of the industry.
By being scrupulously honest in all their dealings, agents can establish the necessary
relationship of trust with their clients. The key is to be consistently ethical.
SELECTING INSURANCE COMPANIES TO REPRESENT
Agents are expected to place coverages for their policyholders in financially sound insurance
companies. In spite of the fact that agents are not actuarial experts, agents are increasingly
also expected to monitor the continuing financial solvency of the companies with whom they
have placed business.
An agent has a duty to act with a degree of care that a reasonable person would exercise under
similar circumstances. This prudent person rule is to protect the insurer and the insured from
unreasonable insurance transactions on the part of the agent. This principal states that persons
engaged in activities that can result in harm to others or their property must exert reasonable care in the exercise of
The reasonable care standard requires ethical agents take into account the factors in their clients'
lives that might affect their ability to handle their own claims effectively and efficiently, and deal with other
matters arising from the coverage they have bought. In this way, they are establishing and/or
maintaining their company's public image.
As agents and the general public have become more educated on the variety of options
available, the perception of insurance has changed. While price has always been considered,
additional elements are now commonly looked at as well. Consumers want to know if the
company they are considering can manage its expenses, and investment returns in a way that
allows the company to make good on it's promises in the contract in the future.
DUE DILIGENCE IN BUSINESS
One area of ethical behavior that should not be overlooked deals with due diligence.
Professional agents prefer to deal only with financially sound companies, but many agents may
not know how to evaluate companies.
In the public's view, the level of service and quality of the advice given are linked directly to the
insurance company and that company's performance. Practicing due diligence protects the
agent, as well as the consumer. When an agent takes the time to investigate his companies
(and document that investigation), he or she is protecting their own financial future. Lawsuits are
common and it is reasonable to believe that even a good agent can experience one. Due
diligence is, of course, an ongoing process since companies can and do change over timen for an agent to go to work for an agency and simply accept whatever companies
and products the agency works with. While we would like to assume that an agency has done
their homework, this may not always be the case. In addition, it is possible that the agency
viewed the companies and products only from a point of view of how much commission they
pay and other compensation.
In recent times, agents are being told that due diligence is their responsibility. Often the result of
court actions, it is now being legally determined that individual agents are responsible for the
recommendations they give, the products they sell, and the companies they represent. An
agent who bases his or her company affiliations on commission levels, leads provided, or where
the next convention will be held, may very well be in trouble down the road.
For the agent, due diligence is the analysis of a particular company's products, performance
and financial standing. Insurance makes long-term promises to clients. It is vital to those clients
that the company be able to keep those promises. Due diligence is the agent's analysis of
whether or not the company can, in fact, keep their promises.
In the property, casualty and liability fields, major disasters, such as earthquakes and
hurricanes, can cause company failures if financial resources are not adequate. Insureds who
are not sold enough or the right kind of insurance may never recover from a business or
personal property of liability loss.
For the insurance company, due diligence is an ongoing process which insures that pricing
objectives are being realized, and that integrity and consistency of internal procedures are being
maintained. It is working with the agents and agencies, as well as their policyholders, to
preserve fairness in all parts of the operation. For the company, due diligence also means
making investments that are sound and prudent.
There are many ways that an insurance company can get into trouble. Usually it is a
combination of problems; seldom one problem alone. Perhaps losses greatly exceed gains and
capital and surplus are consumed. When money goes out faster than it comes in, no business
or individual can run efficiently. When this happens, policyholders may begin to withdraw their
money, which only intensifies the existing problems.
FINANCIAL STRUCTURE OF INSURERS
It has become increasingly difficult to predict the amount of loss reserves that an insurer must
hold in order to maintain financial security. This is especially true for property and casualty
companies because of liberalization of insurance contract interpretations and the expansion of
theories of tort liability. Insurance companies have the potential of much larger losses in today's
world than was present in the past when the policy was priced and the premiums were
FISCAL STABILITY OF INSURER
An insurer’s fiscal stability rests upon its ability to accurately calculate the monetary amount of
the risks it assumes through the policies it issues and to charge rates which balance that sum,
all within the rating regulatory framework governing the industry. The carelessness of agents in
responsibility to the insurer to be aware of the effects their activities may have upon its fiscal
The life insurance industry has become increasingly complex of investment oriented life and
annuity products, interest rate volatility, the reduced certainty of future cash demands and
growing policyowner and public perception. The banking systems financial problems have
added additional stress as policyholders feel less secure about major institutions, including
insurance companies. All of these factors have affected the credibility of even well established
Gathering Company Information
An agent needs to begin his due diligence process by gathering information on the major
components of the company from as many sources as possible. This would include seeking
information directly from the company, talking to their immediate manager or regional manager,
the home office (especially the underwriting department), and even the company's competition.
Often, an agent can learn a lot from simply asking other agents who have been with the
insurance company for a relatively long period of time. Find out about the speed of the
company's claim service since this is often an indicator of company solvency. Find out if
commission checks seem to be consistent, correct and on time.
Statutory Financial reports
Each year insurers are required to file with the Commissioner a statement describing their
financial condition and affairs as of the previous year. The statement must show the insurer's
capital stock and paid-in capital, if any, its assets, liabilities, income, expenditures, reinsurance,
and premiums. It must include a balance sheet of all business. The Commissioner may also
request that insurers file additional reports during the year.
Investment income in excess of losses and premiums earned in excess of operating expenses,
claims paid and amounts credited to cash values are taxable as income to the company.
The agent should collect the financial statements of his or her insurers and study them. Does
the company seem to be making excessive profits? Does the company seem to be making too
little profit to ensure survival? Compare the company’s surplus in relation to the amount of
business being produced. Ask the state Insurance Department to see if there are any watches
or cautions outstanding. The number of consumer complaints the company has experienced in
the past year as well as a three year period to see if any pattern seems apparent. The agent
may also want to watch for any shifts in the management of the company which can change the
philosophy of the company.
Insurance Company Rating Services
Several organizations rate the financial strength of insurance carriers, based on an analysis of a
company's claims experience, investment performance, management, and other factors. These
gs are one of the most widely used indicators of financial health (or the lack of it) in the
The objective of the rating services is to evaluate the factors which affect the overall
performance of the insurance companies. By doing so, they provide their opinion of the
company's financial strength, operating performance and ability to meet its obligations to the
policyholders. The procedure includes both quantitative and qualitative evaluations of the
company's financial condition and operating performance.
Each firm uses a different methodology for evaluating the financial strength of insurance
companies and the firms don't all do business in the same way.
Firm Scale, Highest to Lowest
A. M. Best Company A++, A+, A, A-, B++, B+, B, B-, C++, C+, C, C-, D, E, F
Weiss Research A+, A, A-, B+, B, B-, C+, C, C-, D+, D, D-, E+, E, E-, F+, F, FStandard
& Poor's AAA, AA+, AA, AA-, A+, A, A-, BBB+, BBB, BBB-,
Duff & Phelps BB+, BB, BB-, B+, B, B-, CCC, CC, D
Moody's Investors Service Aaa, Aal, Aa2, Aa3, A1, A2, A3, Baal, Baa2, Baa3, Bal, Ba2, Ba3,
Bl, B2, B3, Caal, Caa2, Caa3, Cal, Ca2, Ca3, Cl, C2, C3
A given rating is meaningless, or even misleading, if it is not placed within the context of the
scale. For example, an "A+" rating sounds like it belongs at the top of a scale, yet it is a top
rating only if the rating service it comes from is Weiss. If it comes from A. M. Best, it is the
second highest rating. If it comes from Standard & Poor's or Duff & Phelps, it is the fifth highest
rating. Similarly, a rating of "A1" sounds like it could be the top of the scale. But it is the fifth
highest rating from Moody's Investors Service.
In addition, it is helpful to know what percentage of the companies rated by a given service
earns that service's top rating. A.M. Best and Weiss both rate hundreds of companies. For
A.M. Best, fewer than 10% of those companies earn its top rating of A++. For Weiss, fewer
than 1% of companies earn its top rating of A+. Standard & Poor's, Duff & Phelps, and
Moody's, the fee-based services, rate only a fraction of the companies rated by A.M. Best and
Weiss. For Standard & Poor's, about 30% of companies earn its top rating (AAA), and for Duff
& Phelps, a little over 20% earn the top rating (also AAA). For Moody's, 15% of the companies
it rates earn the top rating of Aaa.
Agents have an ethical duty not only to disclose facts, but to make sure that clients understand
what those facts mean. Agents should not merely provide clients with the financial rating of
their company, but also indicate where that rating falls on the scale used by the rating service.
In addition, since ratings from two or more services are available for many insurance
companies, agents should disclose all the ratings of which they are aware, not just the most
If a financial rating changes after a client has purchased a policy agents may have an ethical
obligation to disclose the change. If the change in rating is a sign of a material risk to the client,
agents would have an ethical obligation to disclose the change. If it is serious enough that the
agent himself or herself would be concerned about it, then the agent should provide that
information to clients.
Protection against insurer insolvency is one of the principal concerns of regulators in the
insurance industry. Insurance insolvency regulations govern areas such as the organization
and ownership of a new company, capital and surplus requirements, reserves, accounting,
investments, annual statements, and the rehabilitation and liquidation of impaired insurers. In
addition to these areas of regulation, insurance departments in many states have adopted
regulations for the establishment of guaranty associations in the event that an insurer does, in
spite of regulations and precautions, become insolvent.
State Guaranty Associations are organized to protect claimants, policyholders, annuitants and
creditors of financially impaired or insolvent insurers by providing funds for the payment of
claims and other related policy benefits. The Associations are composed of the insurers
authorized to transact a particular line of insurance business within the state. Member insurers
are assessed certain sums of money (most often based on the percentage of premiums each
insurer has individually earned in the state) to cover the Association's operating expenses. If an
insurer insolvency should occur, each member insurer is assessed additional fees to cover the
Most states prohibit insurance agents from referring to the existence of Guaranty Associations
during the insurance advertising or sales process, in order to prevent misunderstandings on the
consumers' part that their insurance policies are "guaranteed" or "insured" in the same way that
bank deposits are insured by the FDIC. Agents must walk a fine line between accurately
disclosing the existence and purpose of a guaranty association without in any way implying that
the insurance product being sold is a "safe investment" because of the existence of the
By law, only insurers that have been authorized or licensed by a state may issue policies in that
state. Consequently, an agent must make sure that the insurers he or she represents are
licensed to do business where solicitation is made. State guaranty funds provide a means for
paying at least part of an insured's losses if his or her property-casualty insurer becomes
insolvent and is unable to meet its obligations to its policyholders. The amount of
reimbursement is subject to both a deductible and a limit of liability, depending on the state.
Generally speaking, a state's guaranty fund only covers the liabilities of authorized insurers, so
anyone purchasing policies from unauthorized or unlicensed companies would be at risk if those
insurers could not meet their claims. Some states hold the agent or broker personally liable for
any insurance contract he or she places with an unauthorized insurer.
Agent commissions are generally based on the amount of the premium. At the time of
premium is fully earned by the company. Yet on some policies the agent's commission is paid
on the full, unearned premium collected at the beginning of the policy period.
A commissioned business typically has a great deal of competition. The consumer has many
choices of companies and products from which to buy. It only takes one unprofessional agent in
the company to lose numerous sales.
The commission structure of most companies also places the agent in the ethical dilemma of
selling "higher commission" products in lieu of policies which may better serve the client's
needs. For example, whole life with a higher commission may be sold in smaller amounts
instead of larger quantities of lower commission term insurance.
Property and casualty lines have incentives to use one company or another on the basis of
commissions. Another ethical problem can arise because agents are compensated by
commissions which are only earned if an applicant is approved for the insurance and a policy is
issued. The agent may be persuaded to omit material information from the application or simply
not tell the truth so that the policy will be approved. Selling a lower amount of homeowners
converage in order to keep the premuim down is dangerous. In the recent California fires over
half of all homeowners were underinsured and could not afford to rebuild their homes. Agents
and insurers had failed to properly determine the client’s needs. Clients shopping for the lowest
price, were sold policies which failed to cover them properly when needed.
Disclosure of commissions is a topic of continuing discussion in the insurance industry. It is a
difficult issue, since there are good reasons both for and against requiring agents to disclose
commissions to clients.
Some consumer groups wonder whether the insurance industry has something to hide.
Commission disclosure seems to be reasonable since the amount of commission may give
some indication of how much the agent expects to benefit from the transaction. In addition,
disclosure of commissions and acquisition costs is a standard requirement in other areas of the
financial services industry.
Required commission disclosure might cause changes in commission structures, especially in
the life insurance industry. Instead of high first-year commissions, products might be designed
to pay level commissions for a period of five or ten years, or deferred commissions, a portion of
which would be forfeited if the policy did not stay on the books for a certain number of years.
Some believe that such a commission structure would make agents more service-oriented,
which would be of benefit to the public.
At this point, agents aren't legally or ethically bound to disclose their commissions. But some
agents do so voluntarily. It demonstrates to clients that the agent is being straightforward about
all aspects of the transaction. Clients appreciate being able to evaluate for themselves the
extent to which the agent may be operating out of self-interest or out of a concern for the best
interests of clients. More often than not, clients are suprised at how little commission agents
actually make, especially in property-casulty insurance.
It is often said that the commission structure that has been set up by the insurance companies
have been a primary cause for ethical problems within the industry. When making sales
becomes the priority, without any other aspects considered, integrity can certainly suffer.
Being successful is not unethical. It would be unethical to the owners or stockholders of a
business to avoid profits. Being profitable, however, should not alter other ethical concepts
within the business. Just as profits and ethics can work together, so can ethics and
commissions if other ethical concerns are also considered.
The whole insurance sales compensatory system revolves around commission earnings. The
agent makes a sale and earns a commission. The sales manager may earn an override on the
agent's commission. The measuring device for success is the number of sales made and the
While "good" insurance agents are more concerned with their customers' needs and not
focused on their own compensation, part of the problem is in the way the industry's
commissions are structured. An agent's livelihood and potential for career advancement hinge
on the ability to sell and meet sales quotas.
Unfortunately sales are often made at the expense of the buyer’s needs and objectives. The
agent may conduct poor or incomplete fact finding and needs analysis. Out of financial
desperation, an agent might resort to an unethical practice in an effort to make a sale and earn
Several state insurance departments have also turned their attention to agent commission
structures. Various state laws limit commissions paid on replacement policies, especially for
insurance sold to the elderly (such as Medicare supplement and long term care insurance).
Paying higher commissions up front for new business companies effectively give agents an
incentive for violating fair practices rules such as those prohibiting unnecessary policy
replacement. Insurance companies who use a levelized-type commission structure report
improvements in both policy persistency and agent recruitment.
It has been argued that eliminating the current commission structures and substituting a salary
might attract a more dedicated, committed individual to the insurance business. This type of
financial arrangement might also provide for better retention among agents and lower costs and
expenses to the insurer.
Companies are beginning to reexamine their commission arrangements and make some
changes. Alternative approaches include "levelized" commissions which "even out" the high
first policy year commissions and those of subsequent renewal years. They would have the
added benefit of assuring agents a steadier income stream.
Capital & Surplus
Insurers must have capital in order to cover unexpected losses. Insurers set their premiums at
a level sufficient to cover expected losses. Naturally, all expected losses do not occur as soon
as premium is earned, so insurers’ earned premium is in excess of claims paid out. This excess
is called 'surplus," or 'earned surplus." If earned surplus is more than sufficient to cover future
expected losses and to finance company growth, the company's directors may decide to give
some portion of surplus back to policyowners in the form of a policy dividend.
Insurers are required by law to maintain certain minimum amounts of capital and surplus. If an
insurer's assets minus its liabilities equals less than the sum of its minimum capital and surplus
amounts, the insurer is considered "impaired."
Investment of assets
Insurers are restricted in the type of investments they can make with their general account
assets (these restrictions do not apply to separate accounts funding variable contracts).
Insurers may invest their minimum paid-in capital only in U.S. government obligations; U.S. Post
Office obligations; Canadian or Puerto Rican government securities; state, county, municipal,
road division, and school district bonds; insured mortgages; collateral trust bonds secured by
authorized obligations; farm loan bonds; home loan securities; and bank or savings & loan
accounts. Funds in excess of minimum capital may be invested in any of the preceding plus
common stock, corporate bonds, real estate, limited partnerships, and other investments,
subject to certain restrictions.
INSURANCE INDUSTRY REGULATION
The History of Insurance Regulation
Insurance has been regulated by the states since the beginning of the industry's history in this
country. Insurance was not considered commerce and thus was not subject to regulation by the Federal
Government (Congress). The status of insurance as commerce was, however, tested in 1869 in a
landmark case tried in the U.S. Supreme Court, Paul vs. Virginia. The Court ruled that
insurance was not commerce, and this opinion held until 1944.
The Supreme Court, ruling in the U.S. vs. the South-Eastern Underwriters Association, said
insurance was commerce, and therefore subject to regulations by the federal government. The Southeastern
Underwriters case threatened to throw the insurance industry into turmoil. In response, the U.S.
Congress enacted Public Law 15, better known as the McCarran-Ferguson Act. This law,
passed in 1945, reserves the right of the federal government to regulate insurance in areas
such as fair labor standards and antitrust matters. All other insurance regulation is reserved to
As such, the states carry the major burden of regulating insurance affairs, including the ethical
conduct of agents licensed to conduct business within their borders. Regulation of an insurance
agent's ethical conduct is usually conducted through an insurance commissioner's or director's
powers to oversee the marketing practices of both agents and insurance companies in that
state. Many of the regulations governing ethical conduct are derived from model legislation
developed by the National Association of Insurance Commissioners (NAIC).
Today there is joint federal and state supervision of the insurance industry, with the federal
government retaining control in matters that are, or should be, uniform across state lines. The
federal government conducts insurance programs in areas where commercial insurers are
unable or unwilling to provide insurance, such as federal flood insurance, FAIR plans, federal
crime insurance and federal crop insurance. All other regulation is handled at the state level.
THE NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS (NAIC)
All state insurance commissioners, regardless of the title they hold in their respective states, are
voluntary members of the NAIC. The organization has standing committees and works regularly
to examine various aspects of the insurance business and to recommend appropriate state
insurance laws and regulations in an attempt to attain some uniformity of insurance regulation
and practice among the various states.
The NAIC has four broad objectives:
• to encourage uniformity in state insurance laws and regulations;
• to assist insurance officials in administering these laws and regulations;
• to help protect the interests of policyowners; and
• to preserve state regulation of the insurance business.
To promote uniformity among the various states in insurance regulation, the NAIC formulates
and drafts what is called "model legislation." This term includes representative bills or statutes
presented to the individual state legislatures for consideration and passage, creating insurance
law for that state.
The NAIC’s model legislation "Unfair Trade Practices Act," which has been adopted by virtually
every state, seeks to regulate insurance practices by defining and prohibiting unfair trade and
business practices. Prohibited practices include misrepresentation, deception or false
advertising, twisting, inequitable claim settlement and unfair discrimination. The act gives the
state's insurance commissioner the power to investigate insurers and agents when any violation
is suspected. Punishment for violations includes not only a fine, but possibly suspension or
revocation of an insurance license as well.
STATE AND FEDERAL LAWS GOVERNING INSURANCE
The responsibility to regulate the insurance industry is shared by the federal and state
governments. However, the states carry the burden of regulating insurance affairs, including
the ethical conduct of licensed insurance agents. In some states, the regulation of ethical
conduct falls under the category of "marketing practices." Other states refer to it as "unfair trade
practices." All states have established a code of ethical standards for insurance agents through
laws defining what an agent can and cannot do. Though these laws differ from state to state,
there are enough similarities to discuss them in general terms.
State laws governing insurance fall into several broad categories. Laws defining Unfair Trade Practices
are most relevant to ethics. Insurance commissioners in each state are charged with:
• Investigating claims of unethical or unlawful behavior
• Overseeing the issuance of licenses
• Levying penalties for violations of ethical practice (including fines, suspension,
• issuing rules and regulations;
• licensing insurers, agents and brokers;
• suggesting laws to their legislators;
• examining insurance companies' financial operations;
• approving policy forms and insurance rates; and
• overseeing advertising and marketing practices.
Although insurance companies are subject to strict government regulation, many consumer
groups advocate even stricter controls over the ways in which insurers are permitted to do
Agents must learn as much as possible about the nature of various contracts on the market, be
informed about new insurance trends and stay abreast of every aspect of insurance that would
affect the insureds entrusted to their care. Agents must clearly explain policy features and
benefits without misleading or misrepresenting any aspect. Professional insurance agents must
be ready to back up these promises with solid performance and encourage other agents to do
The insurance contract is extremely complicated to understand. Without regulation, unethical
agents and insurers could say almost anything about their own products and those of the
competition without the prospect/insured being able to determine the truth of the matter. Some
have misrepresented the benefits of their policies and have refused to pay benefits which are
legally due the insured.
They write their policies in language that is difficult to understand so that clients cannot possibly
know what it is they bought. Policies are priced at a low level to undercut the competition, or
are priced at a high level to increase profits, with neither level being tied to standard rating
And, because most people buy an insurance policy, stick it in a drawer and rarely look at it
again, the lapse of time between the sale and the claim can work to an unethical agent or
company’s advantage. Abuses may be discovered too late for any remedy to be made. For all
of these reasons, regulation of the insurance industry is required.
Regulating Agent Activities
States have passed a number of laws outlining agent responsibilities in the areas of fiduciary
duty, licensing and continuing education, unfair trade practices, policy delivery, policy
illustrations, replacement, disclosure, etc. Court decisions help refine the standards to which
agents and brokers are held.
The tangle of state regulations, accepted industry practice, and home office guidelines can be
bewildering for agents. Last year's top sales approach may now be against the law and
grounds for termination of agent appointment. One state's unfair trade practice may be
considered nothing more than healthy competition somewhere else.
Licensing of Agents
Licensing of agents is a major method by which states regulate the insurance industry.
Licensing laws require that insurance companies have a license or certificate of authority
allowing them to do business in the state. And, the agents of the company must also fulfill
licensing requirements before they are allowed to act for the insurer in the state.
There are common state requirements for agent licensing, education, examinations,
appointment, renewal, and termination, which insurance companies are expected to monitor.
Under the laws of most states, no person is permitted to be, or act as, an insurance agent,
broker, or solicitor unless currently licensed as such. In many states, adjusters, consultants,
and service representatives must also be licensed.
Also, in most states, agents are prohibited from placing insurance with any insurer with which
the agent is not appointed as an agent.
One of an agent's most important responsibilities is to be legally and properly authorized to sell
the insurance products he or she is selling. This means not only obtaining and maintaining as
current the required license for the lines of insurance being sold, in all of the states in which the
agent does business, but also possessing the knowledge and expertise to sell those lines of
insurance, holding the proper appointments, and meeting all other legal requirements such as
nonresident licensing, countersignature, bonding, etc., as set out in state law.
Any agency employees that solicit insurance business will probably need to be licensed, as well,
in accordance with state law. This usually includes anyone who:
1. Takes applications for insurance
2. Receives or delivers insurance policies for a company
3. Examines or inspects risks
4. Receives, collects, or transmits insurance premiums
Agency employees who are regularly salaried clerical and administrative employees are usually
not required to obtain an insurance license.
Companies must keep accurate copies of agent licenses and other required forms, and keep
accurate reconciliation records and may be penalized if their agents are not in complience with
the licensing and Continuing Education requirements of the state.
The most common violations (and the most common reasons for companies receiving fines and
• Paying commissions to unlicensed agents
• Accepting applications from unlicensed or non-appointed agents
• Failure to notify the insurance department of appointment and termination of agents
• Paying commissions without having a copy of the agent/agency's license on file
• Failure to maintain agent licensing records
Failure to hold the appropriate license or appointment, and selling coverages without proper
authority are among the most common agent-related violations. If an agent was not appointed at
the time of sale, the department of insurance will not hesitate to sanction both the agent and the
State licensing regulations commonly identify:
• Who is eligible to become an insurance agent
• Who is ineligible to become an insurance agent
• How to apply for an agent license
• Who must take and pass a qualifying examination
• Who is exempt from the examination
• Types of licenses required
• Educational requirements
• How to maintain an insurance license
• Conditions for suspension, revocation, or nonrenewal of the license
Eligibility for License
To be eligible for a license as an agent, broker or solicitor, an individual typically must usually
meet the following requirements:
• Be at least 18 years of age
• Depending on the state, be a citizen of the United States, or have applied with the U.S.
Department of Immigration for permanent residence and have declared the intent to
apply for citizenship
• Have been a bona fide resident of the state in which application is being made for
whatever length of time the state requires
• Be trustworthy, have a good reputation, and not have been convicted of a felony or a
crime involving moral turpitude
• If applying for a brokers license, have filed any bond which may be required and be able
to demonstrate to the satisfaction of the insurance department that the necessary
competency exists due to experience or special education to fulfill a broker's
• Have complied with any required preiicensing education laws and pass the required
licensing examination in order to demonstrate competency in the kinds of insurance to
be transacted under the license
• Intend to actively engage in the insurance business with members of the public, and not
use the license principally for transacting a disproportionate amount of controlled
Application for License
Application for an insurance license is made to the state insurance department on forms that
have been designated and furnished by the state. Licenses are issued upon proper filing of the
application, satisfaction of an statutory requirements, and payment of the appropriate fee.
Applications usually require personal information including the identity, personal history,
business record, and insurance experience of the applicant, along with a statement about the
purpose for which the license will be used. Applications frequently include the following
hether or not any license was ever refused, suspended or revoked
• Whether or not the applicant is indebted to any insurer or general agent
• Whether or not the applicant has ever had an agency contract cancelled
If a firm or corporation applies for an agent or broker license, similar information is required with
regard to the firm or corporation, as well as the names of all members, officers, and directors of
the firm or corporation. Each person who is to exercise agent or broker powers must be
identified and must furnish the same personal information required of an individual applicant.
Incredibly, some of the biggest problems encountered by state regulators involve
misrepresentations on the initial agent license application.
Continuation/Expiration/Renewal of License
Subject to continuation of the appointment and payment of the periodic fee, licenses are
renewed. Appointments generally remain in effect until the agent's license is revoked or
terminated or until the agent and/or insurer no longer wish to do business together. Late
charges may be added to the fee if a filing of licence renewal is late.
Each insurer appointing an agent is typically required to file the appointment with the insurance
department in writing and pay the specified appointment fee. The filing specifies the kinds of
insurance to be transacted by the agent. If the insurer wishes to terminate an appointment
It is generally assumed that anyone quoting premiums or discussing terms of an insurance
contract should be licensed. However, insurance departments across the country have
constantly expanded the definition of who should be subjected to licensing as an insurance
producer. Many agency principals have licensed almost all staff members, regardless of how
limited and passive the functions they perform. The staff of insurance companies are exempt
from producer licensing while performing 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 and applicant or other transaction over the phone.
Temporary licensing can be requested when the agency principal or owner dies to allow a
surviving family to conduct business with existing clients. These licenses are usually limited in
duration. Each state may have different rules.
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
e the individual has met all the qualification, application, examination, and other legal
requirements, a license is issued which states the name of the licensee, issue date and
expiration, kind(s) of insurance covered, and any other conditions which apply.
Insurance companies have more discretion in appointing agents than the state regulators do in
licensing them. If an applicant for an insurance license has met all of the qualifying criteria, the
state has no choice but to issue the license. And once an agent license is issued, it can take
many months of administrative process at the state level in order to have the license revoked.
Agents are supposed to report any out of state disciplinary actions to the resident state
insurance department. Similarly, agents are expected to report disciplinary actions to their
appointing company(ies) at the time of the violation, or no later than at license renewal, but this
rarely happens. Insurance companies have found themselves in the embarrassing position of
giving sales awards to an agent whose license is being revoked for violations of insurance law.
Termination of Appointment
Subject to an agent's contractual rights, if any, an insurer may terminate any of its appointed
agents at any time. The insurer is required to give prompt written notice of the termination to
the insurance department (and, of course, to the agent), and must file a statement of facts
related to the termination and reasons for it.
The agent's license is with the state and the agent's contract and appointment is with an insurer.
Depending on the state, loss of an appointment does not necessarily mean that an agent has
lost his or her license. It simply means that the agent may no longer represent that particular
company although he or she may still be licensed with the state.
Licensing laws specify the rules and procedures for terminating the license of agents who show
themself to be untrustworthy or incompetent. Whether a license is suspended or revoked the
state is the final authority of who shall and who shall not sell insurance within its borders.
The director or commissioner of insurance has the authority to revoke or suspend any license or
certificate of authority that he or she issues to companies, agents or brokers.
The most obvious reason for taking this action against an insurance company would be the
insurer's failure to limit the amount of new business it writes to the amount of its policyowners'
surplus. In general terms, policyowners' surplus is the difference between a company's assets
and liabilities. In property/casualty insurance, the insurer can safely write $2 of net new
premiums for each $1 of policyowners' surplus in order to offset any substantial underwriting or
An agent or broker may lose his or her license by engaging in misleading or unethical marketing
practices. Because many consumers are uninformed about insurance, it is possible for
unscrupulous agents to take advantage of individuals by inducing them to buy policies that are
the state or states in which they are licensed sets forth the statutes designed to uphold the
insurance professional's fiduciary position.
State laws differ on what constitutes grounds for denial, suspension, revocation, or nonrenewal
of an insurance agent's license.
In most states, an agents or broker's license may be revoked, suspended for up to 12 months,
or license renewal may be refused for the following:
An unethical act can have severe repercussions because what most states consider unethical,
is also illegal. In most states, an agent's license can be suspended or terminated for any of the
following unethical actions:
• making a materially untrue statement in the application for an agent's license;
• violating or failing to comply with insurance laws in other states;
• using fraud to obtain a license;
• misappropriating funds;
• misrepresenting the terms of a contract;
• being convicted of a felony;
• being convicted of an unfair trade practice;
• having a license suspended in another state; or
• engaging in fraudulent, coercive or dishonest practices, or being incompetent,
untrustworthy or financially irresponsible.
• Any cause for which the original license or any renewal would have been refused
• Willful violation of or noncompliance with any insurance statute, lawful rule or regulation
• Misrepresentation or fraud in obtaining or attempting to obtain an insurance license
• Misappropriation or conversion to personal use, or illegal withholding, of monies
belonging to policyholders, insurers, beneficiaries or others and received during the
conduct of insurance business
• Suspension or revocation of an insurance license in any jurisdiction
• Conviction by final judgment of a felony involving moral turpitude
• Conduct of insurance affairs showing the licensee to be incompetent or a source of
injury and loss to, or repeated complaints by, the public or any insurer
The license of a firm or corporation also may be suspended, and the revocation or suspension
of an agent or broker license will automatically revoke or suspend the licenses of all solicitors
appointed by that agent or broker.
Most agent licenses are suspended or revoked based on fiduciary misconduct (such as
commingling, misappropriation, or improper withholding of client funds, and failing to remit
return premiums due), charging of additional fees, felony convictions, etc.
Insurance departments have investigative units that follow up on complaints of wrongful conduct
on the part of insurance agents. Insurance departments have the power to investigate, review,
and may impose civil penalties in the form of fines and jail sentences based on the violations
In most states, an agent or broker whose license has been revoked may not apply for a new
license for at least one year. Further, in many states, the insurance director or commissioner
may stipulate that, as a condition of relicensing, the agent maintain a bond protecting the
citizens of the state for at least five years.
When agents are terminated for cause, the insurance company is supposed to notify the
department of insurance. In practice, companies may be reluctant to call attention to their
internal disciplinary actions.
Agent domicile (the state in which the agent resides and has a primary place of business) is a
rapidly changing area of law. Currently, many states will grant non-residents a producer license.
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.
Other 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 by the public. Where the business entity is a "fictitious name", such
name should be registered with the insurance department.
Many states require that an agent print his or her insurance license number on his or her
business card, in advertisements, and on other materials given to the public. Many states also
have a website where consumers can look up the status of an agents license. Whether they are
in fact properly licensed, and in good standing; if they are up to date on their continuing
education (including which courses they’ve taken); and if they have been subject to any fines,
penalties, suspensions or revokations. This makes it easy for consumers, insurers and
prospective employers to obtain this info in a timely fashion.
State Insurer Regulation of Policy Provisions
States also regulate insurance policy contract provisions. Standardized policies or provisions in
some lines help meet the criteria of uniformity proclaimed by the NAIC. State law may require
that certain terms be defined in a particular way. Other laws state that policies be easy to read,
States require that any insurance policy to be sold in that state be submitted for review and approval
before it is offered to consumers; states have the power to reject policies which do not conform to
their regulations and laws.
Rates Are Regulated by Law
Rates are also regulated by law, with companies in most states having to file rates assigned to
their policies with the state insurance department for review.
There are three main areas insurance commissioners review in regard to rates:
• Rates must not be so low that they do not cover the insurer’s anticipated losses and
administrative expenses; nor must they be lowered to establish an unfair advantage over
• Rates must not be so high that they exceed anticipated losses and administrative
expense, thus placing an unnecessary expense on consumers.
• Rates must be fair, in that no individual with the same risk as another pays a higher rate.
If a higher rate is paid for the exact same coverage, then there must be a valid reason,
such as age, physical condition, and the like, for the difference.
Insurance Commissioners Investigate
Insurance commissioners also have the legal right to investigate and examine companies operating
within their states. They may conduct examinations when they have reason to suspect that the
company is in violation of insurance laws, and they are required to examine all domestic insurers at periods
set by law.
When insurance companies become insolvent, an investigation will often yield the information that officers
of the company have used false financial statements to conceal the company's shaky condition.
Filing false financial statements is a serious offense, punishable by both fines and imprisonment.
UNFAIR TRADE PRACTICES
The Unfair Trade Practices Act, first introduced by the NAIC in 1947, has been continuously
updated and adopted by the states. The Act which, is generally divided into two parts - Unfair
Marketing Practices and Unfair Claims Practices, defines and prohibits certain trade and claims
practices which are unfair, misleading and deceptive, including sales and marketing practices,
discrimination in rating and underwriting, policy cancellation and nonrenewal, and claims
investigation and settlement. While most of these laws are directed mostly towards insurance
carriers, many of the requirements apply specifically to insurance agents.
This section includes a brief summary of the prohibited unfair practices that relate to agent
behavior that most states have adopted. This list is by no means exhaustive. For more detailed
information about what is required by a particular state, refer to that state's unfair practices laws
and regulations. Keep in mind that any act can be considered an unfair practice upon
Although certain practices may be unethical largely because of the situations in which they
occur, other practices are unethical irrespective of the situation.
Unfair Marketing Practices
Agents or brokers found guilty of an unfair marketing practice or unfair method of competition
may be fined and have their license suspended. Whatever the case, the agent must cease and
desist from continuing such practices. Repeated violations will likely result in license
suspension or revocation.
Agents should pay particular attention to the responsibilities they have in the following areas:
• Concealment is neglecting to communicate what the agent knows or should know to be true.
• Concealment can be intentional or unintentional. In either case, the injured party is entitled
to rescind the contract or policy.
• Communication that is generally considered exempt from concealment includes:
o Matters which the client/insurer waives (refuses or declines to discuss)
o Matters which are not material and matters which, in the determination of the
"prudent man theory," the other party ought to know.
If an agent intentionally misrepresents any information in an insurance transaction, he is guilty
of fraud. An agent found guilty of fraud may be subject to fines and/or imprisonment.
Failure to Remit Premiums
It is unacceptable for an agent to hold a premium for an unreasonable length of time. An agent
should submit premiums collected to the insurance company at the earliest opportunity. They
must also remit refunds to the insured within a reasonable period. Many states have publishe
drules or regulations specifying how long this period is.
Deceptive Sales Practices
Any communication—either face-to-face, on the telephone, via e-mail or through the postal
service—with a client or prospective client shall not mislead and needs to:
• Properly identify the professional and the company he or she represents
• Clearly identify the products and/or services the professional provides
• Truthfully state the purpose of the communication
Using Euphemisms for "Agent"
The phrase “insurance agent" says something to some prospects that certain agents don't want
can meet those needs. But the general public doesn't always keep this aspect of the
salesperson's role in mind.
Recognizing the general public's wariness of salespeople, agents sometimes adopt other job
titles in identifying themselves to prospects. They call themselves "financial advisers," "financial
planners," "estate planners," and so on.
A life insurance agent is not a financial advisor, financial planner, financial consultant, retirement
planner, pension specialist, or investment counselor. Agents must be very clear to identify
themselves as representing life insurance companies and make it clear that they sell insurance
products. Also agents must be sure to identify the insurer(s) being represented.
Most agents who avoid calling themselves agents don't do so out of an intent to deceive
prospects. They may simply wish to keep prospects from drawing a wrong conclusion about the
way they intend to do business.
However, from an ethical standpoint, it is the behavior itself and not the individual's good
intentions that count. If one is acting as an agent, then the only acceptable way to identify
oneself is as an agent. Anything else is unethical.
For example, an insurance agent who speaks to a prospect with the objective of securing a
sales appointment should identify him or herself early in the conversation as an agent for the
insurance company he or she represents. The agent should make it clear to the prospect that
he or she intends to discuss certain insurance products and services.
Prospects may resist a sales appointment with an agent. To get around this resistance, some
agents attempt to disguise the true nature of their business and the products they sell by calling
themselves financial planners, financial consultants, estate planners, risk managers, etc., rather
than insurance agents.
Often it is the company's lower level sales managers, whose pay is based on the sales
production of the agents they supervise, that encourage deceptive sales practices. Sales
materials and techniques developed in the field may not be authorized and may in fact be in
violation of company policy and state law. Agents who were dismissed for using deceptive sales
practices protested that the sales pitches they used were taught to them by company managers.
Considering how unfamiliar consumers are with the principles underlying insurance contracts,
even a technically accurate product description may be too confusing for the average buyer. If
the customer misunderstands the provisions, coverages, exclusions, and limitations of his or her
policy, the sales practice used may be considered misleading. For example, a proposal
presented to a customer that is titled "Retirement Funding Proposal" or "Private Pension Plan"
might be ruled misleading if the "plan" proposed is actually a life insurance policy.
Researchers for LIMRA (Life Insurance Marketing & Research Association) International have
concluded that no single piece of sales literature or statement made by the agent needs to be
incorrect in order for the sales process to be considered deceptive. If the net result of a sales
practice is a pattern of customer misunderstanding, then the entire sales process can be viewed
Because ethics in the insurance and investment business requires full and complete disclosure
of everything that is material to the sale, the sales person needs to avoid any terms that might
tend to confuse the facts. Unfortunately terms that are used to help describe and clarify the
product at the time of the sale may actually mislead the insured.
Because certain terms have a high likelihood of being misleading when used to describe
features of insurance products, the ethical sales person should avoid them. Some of the terms
that are most likely to get in the way of properly communicating with prospects are:
Terms That Are Misleading… When Discussing...
Account, plan, private pension, program or
Contribution, deposit, investment or payment Premium
Earnings, profit or return Dividends
Account or savings Cash value
Mutual funds or funds Variable life or Annity Separate
Vanishing premiums Using dividends to pay premiums
Do not use inappropriate analogies (something is “similar to” or “very much like” something else)
to explain financial products because it often leads to misunderstanding by the prospect or
client. In many cases, the prospective client remembers only the analogy and may believe the
investment or insurance product is the same as the product to which it was compared.
Eventually, the prospect may discover that the product is not identical to the product used in the
analogy. Frequently he or she then feels that it has been misrepresented and that he or she
has been misled.
Life Insurance is Life Insurance
Calling life insurance cash value accumulations "investments" has gotten many agents in
trouble, and in fact is expressly prohibited by many state laws. Life insurance is a unique
product, and it may seem logical to describe it as one way to accumulate money for retirement,
to fund charitable giving or a child's college education, or to function as an investment product,
but it's not good business practice and can quickly get agents in trouble.
Even variable insurance products should always receive primary representation as insurance. In
many instances the problem has been that life insurance hasn't been described as life
insurance. Life insurance must always be described a being primarily an insurance (protection)
product rather than an investment or savings product.
concept that often the causes prospects to claim unethical sales practices involves the
payment of life insurance premiums through the use of policy dividends. This concept has
frequently been called “vanishing premiums.” Since premiums really don’t vanish, but are
simply being paid by dividends and the cash value of surrendered dividend additions, the use of
the phrase as misleading. To make matters worse, premiums may have to be paid out-ofpocket
when dividends are diminished. The ethical agent must avoid using the term “vanishing
The term “private pension,” used when referring to a life insurance policy, is also unethical and
has gotten many agents and insurers in trouble. The phrase “private pension” obscures the true
nature of the product since the product being sold was a life insurance policy rather than a
Sale of Life Insurance as a Retirement Plan
The living benefits of cash-value life insurance add a great deal of sales appeal to the product.
However, trouble can arise when living benefits because the main reason for purchase. The life
insurance death benefit should generally take center stage in any sales presentation. If a
prospect isn't sold on the need for a death benefit, he or she generally won't be sold on the
need for life insurance, regardless of how good the living benefits the plan may provide are.
There is almost always a less expensive method to attain the living benefits if the death benefit
is not needed.
Even if all the information the agent provides about the living benefits provided by the plan is
true, if the agent fails to tell the prospect that the plan is life insurance, he or she has omitted a
fact that is material to the prospect's purchase decision. Such omissions are illegal, being
violations of the prohibition against misrepresentation. Such omissions are also unethical, since
they are not in the best interests of the client.
Premiums and Cash Values
An unethical agent who wishes to disguise the fact that the product was life insurance might
choose to refer to premium in some other way. Some of the other terms that are used to refer
to premiums and obscure the nature of the insurance product include:
The use of these terms obscures the facts and is unethical.
Cash values should never be referred to as equity, savings, passbook savings, liquidity
accounts, emergency accounts, or earnings. Agents should never imply that tax-deferred
means tax-free. The word "guaranteed" should be used with care, since life insurance buyers
do not easily understand which elements of the policy are guaranteed and which are not.
Insurance vs. Investments
In life insurance, there are distinct and definite prohibitions when it comes to describing life
products. Topping the list of things agents should never say are phrases about investing and
Agents must keep in mind the reason that life insurance has traditionally been afforded such
favorable treatment under the tax code is that life insurance is the only method to mitigate the
catastrophic and irreversible financial consequences of death. In other words, life insurance
owes its tax advantages to its unique death benefit.
While some government programs, such as Social Security, provide benefits to qualified
survivors in the event of a covered individual's death, such programs provide only a minimal
benefit, usually only adequate for the basic necessities of life. The tax benefits accorded to life
insurance are meant to encourage people to provide for additional financial security through
private means. By allowing families to maintain their lifestyles and businesses to continue their
operations, life insurance proceeds contribute to the stability of our society.
It would be tragic if the life insurance tax advantages were lost. Provisions that would eliminate
some or all of the tax advantages of life insurance are continually included in proposed new tax
legislation, though the major tax advantages of life insurance have so far been preserved.
In any life insurance sale, it is essential to establish the prospect's need for the death benefit
that the policy will provide. It is then appropriate to evaluate how the living benefits and tax
advantages of the policy compare to the features offered by other financial vehicles. Agents
must always be sure that clients understand that they are proposing the purchase of a life
insurance policy, the primary purpose of which is to provide a death benefit.
A misrepresentation is a written or oral statement which is false. Generally, in order for a
misrepresentation to be grounds for voiding an insurance policy, it has to be material to the risk,
in other words, if the party to whom the misrepresentation was made would have made a
different decision had they known the truth, then it is material.
Agents may say something about a product to a consumer that isn't true, not out of an intent to
mislead, but simply out of ignorance. Because they lack intent, such misrepresentations are not
fraudulent, but they are still illegal and subject to severe penalties.
Misrepresentation may be oral or written, and is the basis of many of the legal problems in the
insurance industry. Although in most cases misrepresentations happens unintentionally the
agent’s ignorance is not a defense against liability arising out of this unintentional
misrepresentation. Existing laws hold agents responsible for misrepresentation based on the
To avoid misrepresentation, an agent must thoroughly understand the product he is selling so
that he can explain it accurately to a prospect. To further protect the consumer, many states
require agents to deliver a Buyer’s Guide to prospects when certain products are being sold,
such as life insurance, annuities, long-term care insurance and Medicare Supplement
An agent, broker or solicitor shall not misrepresent any material fact concerning the terms, benefits or
future values of an insurance contract, including:
• 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
• Making agreements that will result in restraint of trade or a monopolizing of insurance business,
1. Misrepresents the terms, benefits, advantages or conditions of any insurance policy
2. Misrepresents the dividends or share of surplus to be received on any insurance policy
3. Makes any false or misleading statements as to the dividends or shares of surplus
previously paid on any insurance policy
4. Misrepresents or is misleading as to the financial condition of any person or the legal
reserve system upon which any life insurer operates
5. Uses any name or title of any insurance policy or class of policies that misrepresent the
true nature of the policies
6. Misrepresents any material fact for the purpose of inducing or tending to induce the
lapse, forfeiture, exchange, conversion, replacement or surrender any insurance policy
(this illegal practice is known as twisting)
7. Misrepresents any material fact for the purpose of effecting a pledge, assignment, or
loan on any insurance policy
8. Misrepresents any insurance policy as being a share of stock
FALSE OR MISLEADING ADVERTISING
In every state it is unlawful for an agent or any other person to formulate or use an
advertisement or make a statement which is untrue, deceptive or misleading regarding any
insurer or person associated with an insurer.
State regulators have concluded that the use of misleading advertising and sales materials
demonstrates an inadequate control by the company over the content, form, and method of
distribution of its advertisements. Many home offices have now prohibited the use of any sales
and marketing materials unless they have first received approval from the home office. Many
companies allow only the use of preapproved sales materials, and may provide agents with
sample preapproved letters and brochures on agent letterhead. Approved documents receive
control numbers with expiration dates.
Agents should not assume that documents provided by the company in the past are still
Responsibility for compliance is being redefined. The standards by which individuals and
companies are being held accountable have changed. Increasingly, insurance companies are
being held responsible for the actions of their agents, and agents are being held responsible for
their conduct through license revocations and in some cases, criminal prosecution.
NAIC Guidelines for Insurance Advertising
• All insurance advertisements must be truthful and not misleading in fact or implication. Words or
phrases that are clear only through familiarity with insurance terminology cannot be
• All information required to be disclosed (i.e., exceptions, limitations of benefits, exclusions from
coverage) must be printed conspicuously next to the statements to which the information
related and displayed in such prominence that it's not minimized, confusing or
misleading (no fine print).
• Deceptive words, phrases or illustrations may not be used to describe a policy, its benefits, the
losses to be covered or premiums payable.
• Testimonials must be genuine, represent the current opinion of the author, be applicable to the policy
advertised and accurately reproduced.
• Disparaging remarks or statements about another insurer, agency or agent of another
insurer, their products and services may not be used in any advertisement.
• The identity of the insurer must be clear in all advertisements, as well as the name,
address and phone number of the agent placing the advertisement.
FALSE FINANCIAL STATEMENTS
It is a violation for any person to deliberately make a false financial statement regarding the
solvency of an insurer with the intent to deceive others. An agent could be found in violation for
telling an applicant that the insurance company with whom the coverage is being placed is
financially stable when in fact its financial condition has been downgraded or declining steadily.
When insurance companies become insolvent, an investigation will very often yield the
information that officers of the company have used false financial statements to conceal the
company’s shaky condition.
There have been cases where officers of insurance companies raided the company treasury,
often transferring the funds to offshore banks.
REBATES AND INDUCEMENTS
Another practice that most consider to be unethical, as well as illegal in most states, is rebating.
While the giving of gifts to customers takes place in many industries, this practice is generally
forbidden in the insurance and investment businesses. Rebating involves the giving or
g is also considered a violation of the Unfair Trade Practices Act in most states (Florida
and California are exceptions). The offer of sharing commissions with the insurance applicant is
a type of rebating.
Rebating includes any of the following activities when used as an inducement to the purchase of insurance
• Making agreements that are not plainly expressed in the policy
• Paying or giving directly or indirectly a rebate (kickback) or other consideration of the
required premium payment not specified on the contract
• Giving any special favor or advantage in dividends or other benefits
• Giving any valuable consideration not specified in the contract
• Giving, selling, offering or promising any shares of stock or other securities, or any dividends,
returns or profits on such securities, or any advisory board contracts
The subject of rebating commissions elicits strong emotional responses, both positive and
negative. Rebating occurs when the buyer of an insurance policy receives any part of the
agent's commission or anything of significant value as an inducement to purchase a policy.
Rebating is illegal in most states because unregulated rebating can be detrimental to
consumers as a form of discrimination in the sale of insurance.
In the states where rebating is legal (Florida and California), agents who offer rebates must be
careful not to violate the anti-discrimination statutes. California's anti-rebate provisions were
repealed when the controversial Proposition 103 was passed. Florida permits rebating in
certain situations, under a rebate schedule which must be filed by the agent and which must be
applied "uniformly" to those purchasing a policy from the agent.
Some companies have a policy against rebating even where it is permitted by law. They may
include an anti-rebating clause in their agency contract. Even in states where it is legal, and
their insureres allow it, many agents decline to offer rebates and find that their clients are
generally willing to pay for the service they provide.
Some agents believe they should be able to voluntarily relinquish part of their commission if it
will help them close a sale, while others believe that allowing rebates encourages unethical
behavior and gives an unfair advantage to larger agencies that can better afford to give up
Gifts are Rebates
During any insurance transaction, and when advertising, agents must not offer a free gift,
bonus, or anything of value outside of the policy or contract, which is an inducement to buy.
State laws differ on how 'anything of value" is defined.
Most insurers do not permit their employees to accept or provide any gifts or favors which might
influence decisions involving business transactions. Even a nominal gift might appear to be
influential with regard to business transactions (and could be construed as a violation of antirebating
laws). Included in this compliance function, are prohibitions against gifts of value to
government officials of both this country and foreign countries.
There are exceptions to the provisions concerning discrimination and rebates. The payment of
policy dividends, retroactive rate adjustments, and reduced premiums that reflect the savings of
direct payment to an agent or home office are not usually considered to be rebates.
Similar to, and often confused with, rebating, the payment of referral fees is unethical as well as
illegal in many cases. Even in states where rebating is legal, referral fees are not. The reason
for this is that it amounts to payment of commission to an unlicensed person. For example an
agent may offer a cash or other type of inducement to clients to refer their friends to them.
Another agent might pay a fee to other sales persons for referring them to the agent for auto
insurance or to real-estate agents for referring homeowners policies.
Many insurance agents pay referral fees to attorneys, accountants, auto dealers, financial
planners and others for referring clients for insurance. This is illegal and must be avoided by
agents. This includes non-cash payments or gifts including tickets to sporting events, vacations,
gift certificates, etc.
It is also unethical and illegal in most jurisdictions for an agent to receive a referral fee as well,
such as from a lawyer, accountant or body shop or other repair service in conjunction with
repairs including claims of their clients. For both the person paying such a fee and for the
person accepting such a fee, this represents a conflict of interest.
Sometimes when an agent fears he or she is losing a sale due to the amount of the premium,
figures may be incorrectly stated for the benefit of the sale. Such situations may be merely
misunderstandings. Premium amounts may also be misstated simply because the agent is
inexperienced in using premium tables or software.
Lowballing occurs when an agent intentionally misquotes premium information to the consumer
and accepts a low deposit just to get the business (and undercut the competition). The
consumer is eventually billed by the insurance carrier for the difference.
BOYCOTT, COERCION, AND INTIMIDATION
It is a violation of the law for any person to commit (or agree to commit) any act of:
• coercion, or
resulting in or tending to result in an unreasonable restraint of (or monopoly in) the business of insurance.
The act of refusing to transact insurance business dealings with another until he or she
complies with certain conditions or concessions.
Agents and brokers are prohibited from acting in any manner that would lead the insurance
prospect to believe that he or she must purchase from a particular agent, broker or company.
Any false, maliciously critical or derogatory communication, written or oral, that injures another's
reputation, fame or character is considered defamation. Individuals and companies both can be
defamed. Unethical agents practice defamation by spreading rumors or falsehoods about the
character of a competing agent or the financial condition of another insurance company. These
actions are illegal in most states.
Agents should find out what their company's policy is regarding product comparisons to
competitors' products. If they are permitted, then the agent should be sure to make fair
comparisons' and avoid comparing policies that do not share common features.
It is unlawful to permit discrimination between individuals of the same class or insurance risk in
terms of rates, premiums, fees and policy benefits, based on their place of residence, race,
creed or national origin.
However, underwriting standards may be based on actuarially sound principles (such as
statistical proof that women live longer than men, or that younger drivers are higher risk than
older drivers, thus affecting the level of risk).
This means that neither the insurer nor the agent may cancel, limit, or refuse to insure or renew
insurance coverage based on unfairly discriminatory standards. Primary responsibility for
compliance with this law falls with the insurance carrier. Agents and brokers should be familiar
with the anti-discrimination laws and should refuse to comply with insurers engaged in
discriminatory sales or underwriting.
Unfair discrimination exists when two people of equal risk are charged different rates because of
a difference in race, religion, national origin or where they live (redlining). Property and casualty
insurers may charge different rates based on territory or protection class. These differentiations
are based on company loss statistics and are not considered unfairly discriminatory.
Consumers have the right to be treated fairly by an insurer's underwriting guidelines. This
means that the guidelines used for underwriting a company's insurance policies should have a
sound actuarial basis, be relevant to the risks being insured, and be applied uniformly to people
• the dividends or other benefits payable, or
• any other terms or conditions of the contract.
With respect to accident and health insurance It is unlawful in most states to make any unfair
discrimination between individuals of the same class and essentially the same hazard in:
• the amount of premium,
• policy fees,
• rates charged for the policy or contract,
• the benefits payable,
• terms and conditions of the contract, or
• any other manner.
The law further provides that insurers cannot:
• refuse to insure,
• refuse to continue to insure,
• limit the amount or kind of insurance available to an individual, or
• charge a different rate for the same coverage
solely because a person is blind or partially blind, or mentally or physically disabled.
This does not prohibit an insurer from such discrimination when the refusal or limitation is based
on sound actuarial principles. Nor does it modify any other provision of the law relating to the
termination, modification, issuance or renewal of any insurance policy of contract.
Many insurers argue that they need to control potential losses and that they should be permitted
to limit coverage or even refuse to write homeowners coverage in areas where losses have
been frequent or severe. However, under the provisions of the Fair Housing Act, a licensed
individual or company may not refuse to provide homeowners or renters insurance solely on the
basis of the geographical location of the insured's property. The practice of redlining occurs
when a company "draws a red line" around a specific geographical location and refuses to
insure properties located within its boundaries.
When coverage is issued in a redlined area, another form of discrimination takes place that
involves charging higher premiums for comparable policies and charging higher rates for inferior
policies. The U.S. Department of Housing and Urban Development (HUD) prosecutes
insurance companies that intentionally engage in practices that have the intent and effect of
denying, limiting or restricting homeowners insurance for people living in minority
neighborhoods throughout the United States.
The NAIC's Unfair Trade Practices Act was amended in the 1970s to prohibit unfair
discrimination based on the geographic location and age of a residential property (however,
actuarially sound discrimination is permissible). Allegations of redlining come up most often in
Studies show that urban residents have limited access to limited coverages from a limited
number of companies, for which they pay higher-than-standard premiums and are subject to
more frequent policy cancellations and nonrenewals.
Insurance companies have the right to be discriminatory; they just can't be unfairly
Many states underwriting regulations prohibit the use of underwriting criteria based on:
• Marital status of the applicant, insured, or other person residing in the household
• Length of time at the address
• Employment status (including length of time employed)
• Level of education of the applicant or insured
• Failure of applicant or insured to purchase an additional policy which he or she did not
• Applicant’s status as a member of the armed forces
Such groupings would be considered unfairly discriminatory if they are not actuarially supported,
not relevant to the risk, or are based directly or indirectly on race or ethnicity.
It is illegal to engage in, to make, or to permit any unfair discrimination between individuals or
risks of essentially the same hazard by refusing to issue, refusing to renew, canceling or limiting
the insurance coverage solely because of the geographic location of the individual risk, or with
respect to any residential property risk (including personal property contained therein) solely
because of the age of the property unless:
• The refusal, cancellation of limitation is for a business purpose that is not a mere pretext
for unfair discrimination, or
• The refusal, cancellation or limitation is required by law or a regulatory mandate.
Individuals living in inner-city areas were sometimes charged higher fees for coverage than individuals
living in the suburbs, even though geographic location was not one of the bases of actuarial
determination of rates.
The mere age of a property does not in itself denote a bad risk. Many very old properties have
been maintained, or restored, until their condition is equal to that of a brand-new structure.
People living in certain areas, or whose homes are in structures of a certain age, may be subject to rate
discrimination that is not tied to actuarial principles.
Fee Based Compensation
In most occupations professionals set their own fees. The marketplace determines if those fees
are appropriate. Although a professional’s fees, if any, should be fair and reasonable, the most
significant ethical issue with respect to fees is that they must be clearly disclosed. This
disclosure must fully outline the scope of the work to be accomplished and be made before any
work is done to enable the prospect or client to make an informed decision with respect to hiring
The compensation of agents should be in proportion to the time and effort it takes to sell and
service insurance policies and meet regulatory requirements for underwriting and policy
delivery. Some agents and agents groups have advocated fees instead of commissions. In this
way agents can be paid based on the amount of work they do for a client instead of on the
amount of premium paid by the client.
The increased sophistication of insurance consumers demands more information and service
from the agent. This, combined with reduced commission levels from insurance companies, is
leading agents to consider charging fees for service.
Most states allow fees to be charged only after the broker/agent has received written permission
in advance from both the insurance company and the client. Other states require producers
who want to charge fees to file a request with the insurance department. Some states require a
separate license in order for an insurance professional to charge a fee; for example, California
prohibits life agents from receiving fees unless they are licensed as and acting in the capacity
of, a life insurance analyst.
For example, broker fees are permitted in California, but unethical and abusive practices have
prompted full disclosure and limits on the amount that can be charged.
It is generally illegal for an agent or broker to charge fees in addition to the policy premium for
services which are not "truly" extra. In many states, it is illegal for any person or insurer to
collect premiums or make charges which are "not specified in the insurance contract".
In many states agents must disclose not only fees but all compensation received from their
transactions for that client including commissions, bonuses, prizes, fees, etc.
Additional charges may not be made for services which a producer would normally be expected
to perform in connection with the sale of an insurance policy (such as evaluating the applicant s
needs, recommending coverages, and processing the application).
Extra services for which additional charges may be permitted are those which are not in the
scope of the producer's regular duties. These may include special research activities, or
services performed as a convenience to the insured where the producer incurs extra additional
expenses which are to be passed on to the insured. Usually, if an agent or broker is going to
perform and charge for an extra service, the service and the amount to be charged must be
specified in a written agreement, and it must be approved by the applicant or insured prior to
performance of the service.
Some agency contracts limit or prohibit the charging of unauthorized fees because it can get
both the agent and the insurance company in trouble. One reason is that fees can be includible
in the insurance company's premium tax liability, so the insurance company must be notified
and give written consent. It is considered safest if brokers/agents either charge a fee or accept
a commission payment, but not both. Any "discounting" of established fees could be viewed as
a violation of rebating restrictions.
Collecting Both Fees and Commissions
Insurance advisers or insurance counselors are persons who provide advice on insurance
matters to clients in return for a fee. The value that clients must receive from the adviser in
return for the fee is an objective analysis of the client's insurance needs and a recommendation
regarding which products will best meet those needs. In most states a license is required to act
as an insurance councelor, advisor, or to otherwise charge a fee for insurance advice, and this
license is different from an agent or broker license. In many states an individual is not allowed to
hold both types of licenses at the same time due to possible conflicts of interest.
There is a conflict of interest between the role of an agent, who will earn a commission for
selling the products of only one or more companies, and the role of an insurance counselor or
adviser, who must be objective about the benefits offered by the products of many companies.
The ability to receive a commission on a sale could easily influence the recommendation an
adviser might make.
For these reasons, agents are prohibited from charging fees altogether in many states. In many
other states, collecting both a fee and a commission in connection with the same insurance
policy is prohibited. In some states, collecting both a fee and a commission is permitted. In
certain of those states, specific requirements must be met in order to do so. Where collecting
both a fee and a commission is permitted, agents must not only comply with all applicable legal
requirements, but must also resolve the conlfict of interest by adhering to ethical standards.
• Agents must put aside their own self-interest and truly serve the client's best interests by
making objective analyses and recommendations as advisers; and,
• Agents should make sure that the value provided to the client in return for the fee includes
some service other than the recommendation to purchase the particular policy. Generally, a
client should be able to obtain a recommendation to purchase a policy from an agent in
return for only a commission.
Unfair Claims Practices
Unfair Claims Practices are considered part of the Unfair Trade Practices Act, and are important
for agents to understand as part of the insurance company's responsibilities towards
Agents and agency employees are usually the first to be notified when a client experiences a
loss. Claims are easier to settle when agents provide guidance to the policyholder throughout
the claims process. Consumers are less apt to file complaints when they feel their claims are
being handled properly. An agents responsibilities at claims time are relatively straightforward
but still very important.
Regardless of the type of insurance, the insurer will usually require a written notice of loss or
claim and supporting documents. Most insurance policies contain loss provisions or a section
spelling out the insured's duties when loss occurs. By helping the policyholder submit a timely,
detailed, and accurate claim, the agent can minimize settlement delays and misunderstandings.
At times it may be necessary to follow up on claims, and to exert a special effort designed to
speed relief for loss victims who may be experiencing unusual hardships.
Depending upon the type of loss, a variety of special requirements may apply: for a life
insurance claim, a death certificate may be required; for an accident or disability claim, a
insurance may not apply if the insured has failed to notify the police of the loss. Property
insurance coverages usually require the insured to protect property from further loss. Liability
coverages may require that the insurer be notified of claims and suits, even if the lawsuits are
groundless. There may be a time limit on when a claim can be filed so that the insurer may
conduct an investigation before paying a claim.
Various provisions may affect the amount of insurance coverage. For example, in property
insurance, a coinsurance clause and the amount of coverage written may determine whether a
loss is paid on an actual cash value or replacement cost basis. Many property insurance
policies include an appraisal clause, which establishes a way to set the value of property if the
insured and insurer cannot agree on the value or the amount of loss. Automobile insurance
policies contain an arbitration clause, which establishes a way to settle an uninsured motorists
claim if the insured and insurer cannot agree on the amount of loss or whether a person is
entitled to payment.
Agents should go over the insured's claim obligations as specified by the insurance policy, and
the client should be told what to expect next from the insurance company when they will be
contacted by a claims adjuster, etc.
Notice of loss provided to the insurance agent is considered notice to the carrier, so the agent
should transmit notice to the carrier as quickly as possible. If the agent receives notice of a
claim but fails to forward it to the company for several weeks, a delay in claims payment could
result. Since many state laws require that claims be acknowledged and the appropriate forms
be provided to the claimant within 15 days of notice, if agents fail to forward timely notice of
claim, the insurance company could face penalties.
Agents should be careful of assuring the policyholder that the loss will be covered unless they
are absolutely sure the circumstances of the loss are within the policy's scope of coverage.
Agents should also not provide legal advice, or make unauthorized decisions on behalf of the
UNFAIR CLAIM SETTLEMENT PRACTICES ACT
Most consumer complaints involve claims-a company's refusal to pay a claim or its dispute
about the amount payable to the claimant. State insurance codes offer some protection to
insurance consumers in this important area and such complaints are often resolved in favor of
The claims settlement practices of insurers are regulated, in the public interest, for two main
• Insurance companys collect policyowner's money for the purpose of settling claiirns
• When insureds' claims are denied, or claim payments are delayed or altered, the
consequences can drastically affect the insured's financial situation
The Unfair Claims Settlement Practices provisions of the Unfair Trade Practices Act (a model
NAIC Act which has been adopted in all states) are designed to protect the insureds and
claimants from any claims settlement practices which are unfair, deceptive or misleading.
• Attempting to settle claims for less than the amount for which a reasonable person would
believe one was entitled, based on written or printed advertising material accompanying
or made a part of an application.
• Compelling insured to institute suits to recover amounts due under its policies by offering
substantially less than the amounts ultimately recovered in such suites brought by
• Attempting settlement of claims on the basis of applications that were altered without
notice to, the knowledge of, or consent of insureds.
• Making claims payments without including a statement of the coverage under which the
claim is being paid.
• Failing to promptly provide a reasonable explanation of the basis relied on in the
insurance policy in relation to the facts or applicable law for denial of a claim or for the
offer of a compromise settlement
• Making known to insureds or claimant that the company has a policy of appealing
arbitration awards in favor of insureds or claimants in order to compel them to accept
settlements or compromises less than the amount awarded in arbitration.
• Delaying the investigation or payment of claims by requiring an insured, a claimant, or
the physician of either to submit a preliminary claim report, and then requiring the
subsequent submission of formal proof of loss forms, both of which contain substantially
the same information.
• Failing to promptly settle claims under one portion of a policy for the purpose of
influencing settlements under other portions of the policy.
• Failure to acknowledge and act reasonably promptly upon communications with respect
to claims arising under insurance policies
• Not attempting in good faith to make prompt, fair and equitable settlement of claims in
which the insurer’s liability has become reasonable clear.
• Failing to acknowledge with reasonable promptness, communications pertaining to
• Misrepresenting pertinent facts or insurance policy provisions relating to coverage at
• Failing to adopt and implement reasonable standards for the prompt investigation of
claims arising under insurance policies
• Refusing to pay claims without conducting a reasonable investigation based upon all
• dissuade a claimant from filing a claim
• Failing to affirm or deny coverage of claims within a reasonable time after proof of loss
statements have been completed
• fail to inform and forward claim payment to a client or a beneficiary
• specifically advise a client not to seek an attorney when seeking claim relief
• mislead clients concerning time limits or applicable statutes of limitation concerning
Some states have added another provision which makes it an unfair claim practice to offer a
settlement or payment in any manner prohibited by law.
An agent found guilty of unfair trade practices by the Insurance Commissioner can lose his or her
license, or have it suspended for a period of time. A license can be suspended or terminated if an agent:
• makes a materially (significant; substantial) untrue statement when applying for an agent's license
• violates or does not comply with other states' insurance laws
• obtains a license fraudulently
• misappropriates funds;
• misrepresents a contract’s terms;
• is convicted of a felony;
• is convicted of an Unfair Trade Practice;
• license in another state is suspended;
• engages in fraudulent, coercive or dishonest practices; or is incompetent; untrustworthy;
or financially irresponsible.
Licenses may be revoked where 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.
Agent licenses have been revoked or suspended for activities where the licensee:
• did not actively in good faith carry on as business the transactions permitted by law,
• avoids or prevents the operation or enforcement of insurance laws,
• knowingly misrepresents any terms of the effect of a policy or contract, or
• fails to perform a duty or act expressly required of him or her by the insurance code.
Agents have lost their license because they have engaged in fraudulent practices or conducted any
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 addition to the specific violations listed, 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.
Following an investigation and a hearing, if the state insurance department finds that an
insurance company has engaged in any unfair trade or unfair claims practice, the commissioner
may issue a cease and desist order prohibiting the individual or company from continuing the
practice. Failure to comply with a cease and desist order can result in a substantial fine (usually
$10,000, but these amounts differ by state). In addition, fines and loss of license may also be
imposed for any company or person guilty of violating the Unfair Trade Practices Act.
While many agents believe that "integrity" is a characteristic of choice, many state laws set
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 interpreted to be the meeting of minimum licensing qualifications
(age, exam scores, etc) or beyond.
Lack of Business Skills or Reputation
Licenses have been revoked where the agent is not of good business reputation, has shown
incompetency or untrustworthiness in the conduct of any business, or has exposed the public or
those dealing with him or her to danger of loss
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.
Agents have lost their license because they have engaged in fraudulent practices or conducted
any 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 addition to the specific violations above, most states establish agent responsibilities that ust
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.
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
While agent files may not be required by 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.
Agents are often contractually required to report any changes of home or business address
immediately to the carrier(s) with whom they hold an appointment, as well as to all regulatory
authorities such as the state insurance department. Statutes usually specify this notice should
be made "immediately," "within 30 days," or "within a reasonable time".
Clearly, an agent's duties to the insurance carrier extend beyond the mere fulfillment of the strict
terms in the agency agreement. As in all business dealings, the agent must:
• Display utmost good faith, honesty, and integrity in dealing with the carrier
• Follow the carrier's reasonable instructions (within the confines of the law)
• Avoid conflicts of interest in representing multiple carriers
• Solicit business that will be profitable both to the agent and the principal
Some responsibility falls to the consumer, as well, to seek out alternate sources of information,
make appropriate inquiries, shop with a few different agents or companies before making a
purchase, and not blindly trust the advice of a single agent. One of the biggest problems is that
consumers have been taught over the years to shop for insurance based on price alone. Just as
you can’t compare a four star resort to Motel 6 on price alone, its impossible to compare
insurance policies or companies solely on price. Consumers need to learn what other factors
are important in order to make the best decision overall. Price won’t matter if the coverage isn’t
there when a claim happens. One of the problems, however, is that competition and advertising
based on price has literally taught insured that there is no difference between agents,
companies and policies except price.
FALSE APPLICATION STATEMENTS
It is illegal for any person to make false or fraudulent statements or representations on or
relative to an application for insurance coverage for the specific purpose of gaining a
commission, a fee, money, or some other benefit from any agent, broker, insurer, or individual.
This would apply to an applicant who, through false statements, will obtain coverage that would have been
rejected were the truth known.
UNFAIR TRADE PRACTICES OF LIENHOLDERS
Because many mortgages or loans are made only on the condition that life insurance to pay off
the loan be assigned or purchased, there are specific trade practices relating to these
All individuals who lend money and/or extend credit, and those who solicit insurance covering
Disapproval by a lender of an insurance policy provided by a borrower shall be deemed
unreasonable if it is not based solely on reasonable standards uniformly applied, relating to the
extent of coverage required and the financial soundness and services of the insurer. Such
standards may not discriminate against any particular type of insurer, nor call for disapproval of
a policy because it contains coverage in addition to that required by the creditor.
No person who lends money or extends credit shall solicit insurance on real or personal
property after a person indicated interest in securing a first mortgage credit extension, until the
person has actually received a commitment in writing from the lender as to a loan or credit
An ethical insurance agent that goes out of business because he or she could not bring in the
earnings necessary to pay their bills will not do the consumer much good. Therefore, the agent
must be both ethical and skilled in his or her trade. In fact, the financially successful agent will
probably find it easier to be ethical since there will be less stress involved to make the sale at
Ethics in Selling
Adhering to ethical principles may require the individual to forgo immediate financial gain. For
many professionals, the benefits of ethical practices are far more valuable than immediate profit.
In addition to the personal satisfaction of conducting their business with integrity, these
professionals are contributing to the betterment of society. Adherence to ethical principles
actually enhances long-term profits. Ethical practices will very likely be repaid many times over
in referrals and endorsements.
The Changing Role of the Sales Professional
The role of the salesperson has changed dramatically as well as the concept of selling. At one
time, the buyer was assumed to be responsible for ensuring that any purchase made was
suitable and appropriate, and the use to which it was to be put.
If the buyer purchased an inappropriate, defective or otherwise unsuitable product, the problem
was his or hers rather than the seller’s. Any recourse required that the buyer prove the seller
was at least grossly negligent or that they acted with an intent to defraud.
Beginning in the 1960s, sellers took on greater legal liability for defective products. This
reflected the greater number and complexity of products available, and a more consumer
friendly legal system. No longer must a buyer prove negligence or intent to defraud on the part
of the manufacturer or seller.
A far more ethical role envisions the sales person as a professional who assists the client in
making decisions that will help to better ensure the client’s health, safety and financial wellbeing,
requiring sales professionals to make decisions involving their clients that are consistently
SELLING TO NEEDS
The most important duty of an insurance agent to a prospect is to be honest in his or her analysis of the
prospect's valid needs. Companies and agencies should stress needs analysis for the various types
of insurance. Agents must make sure they continue to follow the procedures they have been
In the conduct of business or professional activities, an agent should not engage in any act or
omission of a dishonest, deceitful, or fraudulent nature. An agent must not allow the pursuit of
financial gain or other personal benefit to interfere with the exercise of sound professional
judgment and skills.
Because the agent has specialized knowledge about insurance that the prospect does not
possess, and because the agent is licensed and regulated by government authority in order to
protect the public interest, the agent has assumed a duty to act in the best interests of the
prospect. To act in the best interests of the prospect, the agent must take the time to evaluate
the prospect's needs and recommend a product that best meets those needs and is affordable
to the prospect.
Agents who take the long term view of their self-interest find that it does not compete with their
prospects' best interests. By putting their clients best interests first, they also serve their own
best interests over the long-term. Not only do clients receive the products and service that truly
meet their needs, but agents build the kind of clientele that will make them lifelong successes in
the life insurance business.
Suitability means that the purchase recommendations made by the insurance agent are based
on reasonable grounds that are "suitable" for the customer. The National Association of
Securities Dealers (NASD) defines suitability as "purchase recommendations that are based on
information furnished by the customer about the customer's financial situation, needs, and
investment objectives." Similarly, the Securities and Exchange Commission defines suitable
recommendations as "those made on the basis of the client's needs, financial circumstances,
and investment objectives."
Determining the suitability of a particular insurance product for a particular client is arguably the
most important service the agent provides.
Several states have begun applying suitability considerations to life insurance and annuity
sales. References to "suitability" also appear in other state laws having to do with sales of
insurance products to senior consumers, such as Medicare supplement and long-term care
insurance. The regulations generally specify that the agent selling the insurance must have
"reasonable grounds" for believing the recommendation is "suitable" for the customer, based
upon the customer's circumstances, risk tolerance, need for insurance, and existing insurance
already owned. For example in California, agents soliciting seniors for long term care and
Medicare supplement insurance must make "reasonable efforts to determine whether the
Such suitability requirements making it illegal for agents to sell products that are inappropriate
for a client's financial needs, would impose a degree of care (and liability) on agents that has
until now merely been implied.
Needs-based selling and ongoing client service are among an agent's primary responsibility to
the customer. A needs-based analysis is the only way to ensure that the customer gets the
insurance product that is most appropriate to his or her goals and needs.
Today's insurance consumers tend to be more sophisticated with regard to personal finance
and investments, and also more cynical.
Successful agents inform and educate the client about the insurance industry and insurance
Agents should give the client sufficient information about how the insurance product being
recommended meets the clients specific needs, and should always document the final outcome
with a letter to the client that summarizes what was discussed, what was recommended, and
what the client decided to do. Such follow-up letters can save an agent many headaches (not to
mention errors and omissions problems) down the road.
In fact, an agent probably should document all client meetings with a follow-up letter, and should
make notes on any conversations with the client or the carrier with regards to the client.
In securing coverage for the client, the main responsibility as an agent is to act reasonably
under the circumstances. This means that they must also adhere to their ethical responsibilities
to the insurer and see that the prospect completes the application accurately and completely.
At this point, the agent’s primary responsibility is to the insurer since they are acting as its agent
during the application process. The agent is responsible for obtaining full and accurate
information necessary for analyzing the risk and the hazards and exposures involved in order to
determine the prospect's needs accurately. Remember that the insurer is relying upon them for
full disclosure of all pertinent information regarding the applicant.
Doing a ‘needs analysis’ is a fairly cut-and-dry process. However, when the human factor is
brought in, needs analysis can be a challenge to an agent's ethical code. Faced with a client
who simply doesn't want to think about possible loss, an agent may write a policy that represents an
amount of insurance the client is willing to buy, rather than coverage of the client's own needs. When the person
dies or becomes disabled, or when their house burns down and they are underinsured they will
feel that the agent failed to do their duty.
Parents of children with physical, mental, or emotional problems may not want to face the fact
that they must make provisions for the child after they are gone. Denial may take the form of
pretending that the child will one day be able to take care of itself. But an ethical agent must find a way to
see that this very significant need is dealt with and met.
The agent has a responsibility to a client to service the policy with periodic reviews, and keep clients
informed of any changes in insurance instruments or laws/regulations affecting the coverage.
follows two basic rules: sell to needs and service the sale. In doing so, the agent will also live
up to the ethical duties he or she has to policyowners.
Fortunately, most agents recognize that specific types of insurance policies are designed to
meet specific needs, and matching the policy to client needs produces the maximum benefit to
the policyowner. They also know that needs selling involves problem analysis, action planning,
product recommendation and plan implementation. This requires two important commitments
on the agent's part:
• a commitment to the knowledge and skills necessary to carry out those tasks; and
• a commitment to educating the prospect or client about the products and plans that may
be implemented on the agent's recommendation.
Client trust must be earned, nurtured and constantly reinforced. The agent must communicate
to his or her client the reasons why a particular insurance policy or program is being
recommended and how it will serve their needs. Individuals who understand what a particular
insurance plan or policy will do for them are more likely to buy, more likely to be satisfied with
their insurance and more likely to renew their policies. This communication and education
continues long after the particular policy or program is sold and becomes part of the overall
insurance program designed for that client. The professional agent has established his or her
client's insurance program based on needs which should be reviewed periodically, supported by
explanation and communication of the programs put in place to meet those needs.
The first duty of an insurance agent to a prospect is to be honest in his or her analysis of the
prospect's valid needs. Company or agency training courses stress needs analysis for the
various types of insurance, and agents must make sure they continue to follow the procedures
they have been taught.
Because the very nature of insurance, that people are paying for a loss that lies in the future, or
that they may never have, makes selling it more difficult.
Besides being honest and straightforward during the sales process, agents also have an ethical
obligation to provide exemplary service to their clients. This includes staying in touch with
customers and conducting periodic reviews of coverage and needs to assure that customers are
adequately covered. In addition, agents should be aware that they are in possession of
considerable private information about their customers. They should take care to protect the
confidential relationship they have with their clients. Finally, unfair or inaccurate remarks about
the competition must be avoided. Such remarks are not only illegal, but unprofessional. They
reflect badly on the entire industry.
The Professional Sales Process
The sales process is the methods used to sell needed products and services to consumers. The
sales process is the heart of any company’s distribution system. The sales process—from initial
introduction to delivery of the product—may involve multiple meetings, and has four steps:
• The opening and fact-finding interviews
• Recommendations and close
• Implementation and follow up
Basic to the success of the sales process is the salesperson’s ability to develop trust and create
rapport with a prospect. Sales people’s ethics and values contribute more to the success of the
sales process than any techniques or strategies they might use.
Selling is not something that a salesperson does to someone else; instead, it is something that
the professional does for and with a buyer that results in an exchange of value. Elements in the
sales process that create ethical concerns for the sales professional:
Ethical Concerns in the Approach
During this step, the two most ethically sensitive issues are:
• The way sales professionals represent themselves
• What is discussed between the sales professional and the prospect
As a result of the approach step in the sales process, the prospective client should have a clear
understanding of the identity of the sales person, the products or services being offered for sale
and the company or companies the sales person represents.
In the approach step of the sales process, the objective is to motivate the prospective clients to
agree to disclose sufficient personal and financial information to sales professionals to enable
them to determine if a need for an insurance or investment product exists.
During the approach step of the sales process, the important ethical issue is that, at no time,
was the prospective client misled in any way.
The purpose of the approach is to develop rapport with prospects to cause them to come to
perceive the financial sales professional as someone with whom they may want to do business.
How Sales Professionals Represent Themselves
The principal ethical concern in the approach step is that sales persons may state or imply that
he or she has skills, experience or credentials that are not possessed.
Using the designations CPCU, CLU, CFP, ChFC or CPA is improper and deceptive unless
individuals have earned them. Also, using a title such as "financial consultant," "financial
planner," "investment planner," etc., is improper unless the individual is has the proper
Insurance agents, and other financial services practitioners, because of the personal nature of
their business, must be viewed as both competent and credible before the prospective client will
share financial information. Therefore, there is enormous pressure on financial sales
professionals to appear knowledgeable and experienced.
obtain professional education and experience. When that occurs, both the professionals and
their clients benefit. However, if the need to appear competent causes sales people to
misrepresent their credentials, experience or skills, it is a serious ethical problem.
A sales person who states or implies the possession of skills actually not possessed may result
in his or her liability for failing to perform in the manner of someone who possesses such skills.
If the sales person represents or implies that he or she has certain skills, failure to provide that
level of service could make the sales person liable for any damages the client sustains as a
Some sales professionals use a trade name. While using a trade name is certainly acceptable,
its use by sales professionals as a way of identifying themselves without also identifying the
company being represented would be misleading. To the extent that it misleads, it is unethical.
Any implication by the sales person that he or she is affiliated with the government, any
governmental agency or credentialing organization in an attempt to suggest its approval of the
sales person or his or her products is unethical and illegal in most jurisdictions.
Sales professionals must not represent themselves as financial planners, investment planners,
consultants or advisors when, in fact, the practitioner is a life insurance agent or registered
representative. Such a statement suggests to the prospective client that the practitioner
provides unbiased analyses of client financial situations, with no conflict of interest. The selling
of financial products clearly creates such a conflict. Without that statement concerning the
conflict of interest, this title is misleading and unethical and may even be illegal in certain
How Sales Professionals Represent their Products
One of the ethical requirements is that the information provided to prospects is balanced and
complete and enable them to decide whether to work with the sales person based on truthful
information. Any product discussion should result in complete understanding by the listener.
The real nature of the product as insurance should not be hidden or disguised. For example,
the terms “plan,” “program” or “private pension” when referring to a life insurance policy is
unethical, and in some cases illegal, because those terms obscure the true nature of the
product, life insurance.
If the initial approach is made by telephone the sales person should usually avoid discussing
specific products, because an adequate explanation in the relatively short space of time on the
telephone is difficult. An attempt to discuss a complex financial product in this setting often
results in misunderstandings and is more likely to cause confusion, rather than understanding.
Ethical Concerns in the Opening and Fact-Finding Interviews
This step is the first substantive meeting with the prospective client. In the opening interview,
the agent will normally begin to develop rapport with the prospective client and begin to identify
benefits that the individual would receive by proceeding to the next step, the data-gathering
The agent might suggest that they proceed immediately to the data-gathering session or
schedule another meeting at which the data-gathering would take place and ask the prospect if
he or she has family members or trusted advisers that the prospect would like to have attend
It is common for insurance companies to use the services of celebrities and other prominent
people for advertising purposes. Testimonials used in advertising must be applicable to the
policy advertised and be given accurately. Such testimonials must indicate if the person giving
the testimonial is being compensated or has any financial interest in the company.
Testimonial letters from satisfied clients are often used to motivate the prospect. It is important
that any testimonial letters actually reflect the writer’s current opinion. Furthermore, if any
payment was made for a testimonial letter, that must be disclosed to the prospect.
An insurance agent may choose to use visual or graphic material to inform the prospective client
about the potential advantages and benefits of a product. When using graphics or other
illustrations, it's important to make sure that they do not mislead the prospect, and that the
material matches the prospective client's level of understanding.
Most insurers prohibit agents from using any materials unless they have been reviewed and
approved by the insurer (and sometimes even the state) first.
The ethical principles governing full disclosure require that the prospective client be fully
apprised of the sales professional’s status as an advocate for a financial product or insurance.
The prospective client has a right to know by whom he or she is being interviewed. If sales
professionals represent a particular company, their status as representatives of that company
must be disclosed. In addition, if sales professionals are registered representatives, they must
identify the company and broker/dealer, and provide addresses and telephone numbers.
The Fact-Finding Interviews
The object of the data-gathering interview is to obtain sufficient information about the
prospective client to develop a recommendation that is suitable to his or her situation, and
consistent with his or her objectives and tolerance for risk.
The data-gathering step of the sales process presents the insurance agent with an ethical and
legal duty to make a diligent effort to determine all the client's circumstances that are relevant to
his financial situation. In order to make a suitable recommendation, these circumstances include
the prospective client’s current finances, as well as his or her desires and aspirations.
Whenever interacting with a prospective client, care must be taken to ensure that the agent
doesn’t inadvertently lead the prospect to believe that they are providing services not actually
provided. If the sales person becomes aware of any such misunderstanding on the prospect’s
part, he or she is under an ethical obligation to correct it as soon as possible.
The tools that the financial sales professional uses could also lead the prospective client to the
wrong conclusions. Using a data-gathering form which is entitled Financial Planning Form will
lead clients to a conclusion that the sales person is in the business of providing financial advice.
The sales professional has the responsibility to avoid anything that could reasonably be
expected to mislead the prospect, and to correct any misperception of which he or she becomes
During the data gathering session, the agent must make every effort to fully understand the
prospect’s situation. Without such an understanding, the agent will not be able to ensure that
his or her recommendations are suitable for the prospect. An excellent way for the agent to
check his or her understanding is to restate the prospect’s answer and ask if that is what he or
Ethical Concerns During the Recommendations and Close
The final step of the sales process is when agents make recommendations based on their
assessments of prospects’ needs, and seek decisions from the prospects to purchase the
recommended products. The principal ethical issues here are:
• The selection of a suitable product
• Product disclosure
• How the sales professional motivates the prospect or client (fear, guilt or other negative
motivations are not considered ethical, particularly with seniors)
When making any insurance recommendations, several principles that should be adhered to:
• Recommendations must provide complete disclosure to the prospect of all material
elements. All information—both positive and negative—that could reasonably effect the
prospect’s buying decision must be disclosed.
• Recommendations should be balanced and identify both their advantages and
• A proper recommendation will include the benefits to be gained by the prospect, the
costs involved and risks that would be assumed by the prospect.
Insurance products are complicated and require careful explanation. Any products or services
recommended should be clearly identified and explained to the prospect. The explanations
used for insurance products should avoid comparisons to other similar, but not identical,
products or services. Any comparisons with competing products and services should be
accurate, complete and fair.
Products or services recommended must meet a need acknowledged by the prospect and be
suitable for the prospect with respect to his or her age, condition, financial situation and
psychological disposition. It is unethical for an agent to sell an insurance product to a prospect
that does not acknowledge that he or she has a need for it.
When the prospect has a limited comprehension of the basic insurance products and concepts,
the agent should suggest that a family member or trusted adviser be a part of the meeting.
Insurance agents often use statistics as part of their recommendation. Any statistics employed
in making a recommendation should be both substantiated and referenced to enable the
prospect to learn more.
Any material that must be provided by the agent to prospects by law—buyer’s guides,
prospectuses, etc.—must be provided in a timely fashion, before the sale is made. Supporting
materials used in presenting the recommendation to the prospect or client must inform without
misleading, and must:
• Enable the prospect or client to render a more informed decision with respect to the
• Be complete and balanced by disclosing both the advantages and disadvantages of the
recommended course of action
• Clearly identify those elements of the recommendation that are not guaranteed, and
those that are based on assumptions that may not be realized
SALES AND MARKETING
All states have laws prohibiting agents from engaging in unfair or deceptive acts or methods of
competition with respect to selling and servicing insurance policies. The basis for many of these
state statutes is the NAIC's model Unfair Trade Practices Act, which expressly cites false
advertising as an unfair trade practice and prohibits it. In this context, the term "advertising" is
quite broad including almost any kind of communication or presentation used to promote the
sale of an insurance policy.
The burden of complying with state insurance advertising laws rests on the insurance
companies, since most advertisements or promotional pieces, regardless of the writer or
presenter, are considered the responsibility of the insurer whose policies are being advertised.
Most of the advertising and sales literature an agent uses is prepared by the insurer under the
careful eye of its legal staff. For an agent, the ethical issue is not the material itself, but how the
material is used and the deceptive sales presentation that may result.
The insurance agent is key to the sale, marketing, underwriting, and delivery of insurance
policies. Insurance agents and brokers remain the principal contacts for insurance consumers,
and are expected to fulfill certain legal, professional, and ethical obligations toward their clients.
As a marketing representative of the insurer, it is the agent's responsibility to represent and
market the insurer's products in an ethical and professional manner. This requires knowledge
of various insurance products, learning about the prospect's insurance needs and problems,
and how to treat these needs with the proper insurance products. Agents can be a valuable
resource, providing helpful guidance on the most appropriate use of a family's assets and
allowing them to achieve financial goals such as risk management, retirement planning, death
protection, health care, asset protection, etc.
Insurance professionals use a variety of tools and methods to create interest in purchasing or
keeping the products or services they sell or provide to people. These tools and methods must
be used to foster clarity and disclosure to avoid creating ethical concerns.
Sales tools include almost everything that professionals use to communicate with prospects and
clients, including presentations, sales and seminar scripts, brochures and product illustrations.
F:\Books\Ethics & the Insurance Agent.doc 8/17/2005
Every communication designed to influence a decision to purchase a product by prospects or
clients should be considered a sales tool.
Insurance companies have become much more concerned about the sales process, especially
the sales materials used in the field. Many companies now require home office approval before
any sales materials may be used.
Advertising and Sales Literature
Ethical advertising, regardless of its origin, is the responsibility of the insurer. Advertising
information must not be obscure, ambiguous, deceptive, or misleading and must be truthful and
The purpose of state laws governing advertising and sales literature is to provide full and fair
disclosure of all material information. In the past, sales and marketing practices were deemed
unfair, including the companies failure to responsibly monitor and discipline its agents for
improper sales activities.
Companies must also establish clear lines of communication, control, and responsibility over the
dissemination of advertising and promotional materials by company officials whose
compensation is not linked to sales.
States usually require that advertising and sales material may not omit information or use
statements which are misleading to potential buyers. Advertisements cannot use jargon or
terminology that would be confusing for a person not knowledgeable about insurance
coverages. An advertisement cannot use language which exaggerates benefits or fails to
disclose policy exclusions or limitations. In fact, most states require the insertion of specific
wording for consumer protection.
Other ethical advertising standards include the following:
• It is misleading for an advertisement to imply or state that an insurer or a policy has been
approved or endorsed by an individual or, a group, unless it is in fact true
• Statistical information used in advertising must accurate and reflect all material facts.
Usually, the source of the statistical information must be disclosed.
• It is unethical and misleading if advertisements mislead the public with regard to the
purpose of the policy, benefits to be derived from the policy or falsely identifying the type
of policy being advertised. For example, refering to a life insurance policy as an
investment product or retirement plan.
• Life insurance advertising must not imply or state that policy dividends are guaranteed.
Nor may any sales literature or proposals combine guaranteed policy values (such as
the cash value) with dividends which are not guaranteed.
Many states require the company to keep a record of advertisements used in the state; this
would include advertisements used by agents. An interesting question arises with regard to
independent agents who represent several companies and advertise under their own names. In
many states an agent cannot advertise a product under their name alone. Any advertisement
must contain the name and sometimes the logo of the insurer as well as that of the agent.
rtising and Other Communications
Advertising includes advertising in print and other media, as well as:
• Direct mail
• Flyers and handouts
• Personal brochures
• Internet advertising
Advertising and other communications such as e-mails and websites may present special
ethical challenges, especially for insurance or financial sales professionals. The reader must
not be misled in any way by the ad or communication.
Advertising and sales literature sometimes cater to the consumer preference in a dishonest
manner for the biggest or best product. People who fail to read material carefully are often
misled by such advertising and sales material. Honesty requires that in these media no
superlatives be used that are not demonstrably true.
Sales people sometimes attempt to motivate readers to act immediately by stating the product
or service is available, or at a particularly low price, only for a limited time. While there is nothing
ethically suspect about such a claim if it is true, the use of this language in an advertisement or
sales literature when it is not true is dishonest and unethical. All advertising pieces and sales
literature that the professional uses need to be examined to ensure that any exaggerations and
ambiguities are removed.
Motivation of Prospects and Clients
It is also unethical to attempt to motivate prospects and clients by using fear, guilt or other
Ethical sales professionals seek to help prospects and clients to accurately identifying their real
needs and goals. They conduct an objective and comprehensive effort to gather facts and
information. Only then are sales professionals in position to determine what products and
services to ethically propose to prospects or clients.
The advertising industry has long been aware that many consumers are conditioned to more
quickly recognize certain words, such as best, biggest, greatest and other superlatives -- while
ignoring the meaning of other important words like may. For this reason, words such as the
following should be scrupulously avoided, unless there is clear evidence that their use is
accurate and appropriate:
• Low cost
‘Puffing’ occurs when a sales person presents a product in an exaggerated manner by
describing a product as new, best, unique or revolutionary. These and other superlatives, such
as lowest cost, lowest risk, safest and similar words could mislead the reader. Legally and
ethically, this language must be scrupulously avoided, unless its truth can be verified.
Using Ethical Language in Ads and Direct Mail
The objective of an ad or direct mail piece is to generate the maximum interest possible in the
products and services highlighted. However, ads, direct mail and other types of mass
communication may cause ethical problems.
Special care must be taken to present the material in a clear and honest way that prospects and
clients can understand. To accomplish this, sales professionals must ensure that they use
language that is:
Normally, it is impossible to make a full disclosure in an ad or piece of direct mail; there just isn’t
sufficient time or space available. This makes it difficult to include qualifying information that
might be necessary to a complete understanding of the offering. As a result, complete
information concerning exclusions, conditions and other limitations is not included. To prevent
an ethical breach, sales professionals must take particular care to ensure they do not
inadvertently misrepresent either the product or themselves through puffery.
Other terms that are potential ethical breaches are tax-free, tax-favored, tax-advantaged, taxadvantaged
or words that point to the tax benefits of life insurance or other products that offer
special tax treatment should not be used without additional qualifying language that advises
readers to check with their tax advisors for applicability in their specific situations. Because of
the lack of space and time to provide complete disclosure in advertising and direct mail pieces,
it is a good idea to avoid discussing specific products or features in them.
Modifying Sales Tools and Methods
Based on statistics from the U.S. Bureau of the Census, the number of U.S. residents over age
65 has grown substantially and appears likely to continue to grow. Furthermore, the fastest
growing segment of the population is made up of those individuals age 85 and older.
Not only is the current senior market large, its size is projected to double in the next 30 years.
This market growth is the result of general population growth and the discovery of drugs and
Fmedical treatments that have tended to prolong life. However, some members of the senior
market, have certain limitations that need to be taken into account during sales and service.
The senior market is often viewed as a potentially lucrative one for sellers of financial products
and services. Due to a concentration of wealth, however, the senior market is marked by a
disproportionately large percentage of members with limitations, both cognitive and physical.
Because of that deceitful practitioners target the senior market more frequently than any other
The tools and methods used by professional sales people may need to be modified to better
serve specific markets such as seniors or disabled persons. The modifications necessary to
ethically work in the senior market are required because of the individual prospect’s special
needs. As people age, their vision and hearing often diminish, and their ability to reason may be
adversely affected. Because of these limitations, certain prospects may experience difficulty in
reading material with smaller type sizes or be unable to follow a particular line of reasoning in a
Changes may need to be made in the sales professional’s stationery, business cards,
advertising, etc. to ensure that they are readable and understandable by prospects with agerelated
limitations. In addition, the methods that the sales professional employs in the sales
process may require modification to meet the special needs of seniors.
Stationery and Business Cards
How sales professionals identify themselves on their business cards or letterhead is important
because these are typically the first pieces of sales material received by prospects or clients.
States often have very specific laws regarding stationery and business cards used by insurance
professionals. Some companies may have additional requirements. At a minimum sales
professionals’ letterhead and business cards should include:
• Sufficient information to adequately identify them and the company they are representing
without misleading the public.
• The fact that they are insurance agents and their insurance license number
• The address and telephone number of the sales person’s local office and, if part of a
larger organization, show the name, address and telephone number of that
larger organization, and most states require their leicense numbers as well.
Complete and Honest Presentation
Any presentation that gives a prospect or client the wrong impression about any aspect of an
insurance policy or plan is deceptive. Any presentation that does not provide complete
Helping clients to understand how the insurance policy they buy is tied to their particular needs is an
important responsibility for an agent. Clients should also expect that the agent will contact them
regularly to review the needs analysis, and to make any changes required.
Educating the client begins with the application process. In many cases, the client will be
required to sign authorizations for:
• Medical Information Bureau reports
• Inspection reports
• Credit reports
While some people sign these authorizations with no objection, many people feel that such
reports are an invasion of their privacy. It is up to the agent to explain the necessity of such reports
in the underwriting process, and also to stress the confidentiality of the information thus
The application process also offers opportunities for unethical behavior on the part of the agent.
The agent may exclude negative information in the hope they will either get a questionable risk
placed or obtain a lower premium than what should be paid. If an claim happens, however the
policy may not pay, because the client concealed information vital to the underwriting process.
The agent may lose the sale if the client refuses the policy on the grounds that the rated
premium is too high. Professionals are not concerned with sales. They are concerned with
service. Ethics demands honesty in every instance.
The average insurance buyer knows very little about insurance and therefore relies on the
advice and recommendations of the insurance agent. By the time a consumer discovers that a
particular policy does not meet his or her needs or does not live up to the agent's promises, it is
probably too late to purchase another. The potential for deception by companies and agents
alike is significant and the consequences to the consumer can be quite catastrophic.
The insurance buyer can suffer because of a misunderstanding about a policy's terms and
conditions. If a loss goes uncovered because the agent or broker did not fully understand the
risk, the buyer suffers, and the industry suffers. The agent must is to fully understand the
insurer's policies and forms and also be aware of its underwriting, pricing and claims settlement
practices. An agent's duty is to present each policy with complete honesty and objectivity,
pointing out any limitations, exclusions or drawbacks the product may have, along with its
features and benefits. In all cases, a simple, straightforward explanation of the policy and how
that policy will help fit the prospect's needs is always the proper ethical course.
An agent is obligated to fully disclose all information that may affect the insurer and its ability to
conduct business. Full disclosure is most important during the application and claims handling
processes. An agent must complete all applications and claims forms as accurately and
completely as possible. Failure to do so could lead the insurer to follow a course of action it
would not otherwise take (such as issuing a policy to an applicant whose bad driving record had
Disclosure means informing the prospect or client of all facts involving a specific policy or plan,
so an informed decision can be made, This helps meet other goals, too, by helping the client:
• select the most appropriate policy to meet his or her needs;
• understand the basic features of property and casualty insurance; and
• evaluate the relative costs of similar plans offered by a competitor.
The sales professional is ethically obligated to disclose any and all information that may be
material to the prospective client to allow him or her to make an informed decision. A sales
professional should document the file showing the information given to the prospect. The sales
person should provide any material information in written form, even if it is not legally required.
Material information is any information that can reasonably be expected to affect a prospective
client’s buying decision including:
• Benefits of the recommended plan
• The costs involved in the recommendation, including any that may not be obvious.
• The risks and consequences of the recommended purchase
In the old days, sales persons where expected to simply show prospects the benefits they could
expect to receive by purchasing a product or service. It was up to buyers to discover any
disadvantages attached to the transaction.
Today not only are sales professionals ethically called upon to disclose the benefits of the
purchase, they are also required to disclose any fees or risks associated with it. The objective is
to enable the prospective purchaser to make an informed decision, understanding both the
advantages and disadvantage of the purchase.
It is becoming quite common to attach disclaimers to each and every application and/or policy and to require
clients to sign it, in advance of services. Before using any disclosure letter, agents should speak to an attorney
To the extent that any material facts are withheld, or are presented inaccurately, the
responsibility for the purchase decision shifts from the prospect to the agent. If the prospect
makes a purchase decision while not in possession of all the material facts, and things later do
not turn out to the prospect's satisfaction, the agent can be held liable.
Agents must disclose to clients any hidden conflicts of interest that might be perceived to affect
the recommendations the agent might make. If a conflict of interest remains hidden at the time
an agent makes a recommendation, it casts doubt on the agent's motives. By disclosing
conflicts of interest, agents show that they are being completely straightforward and allowing
clients to evaluate all aspects of the transaction.
• Fully disclosed in the agency agreement,
• Fully disclosed in the general agency agreement, or
• Explicitly detailed in other written documents.
Insurance agents have a duty to fully disclose to the insurer all material facts concerning an
applicant or policyowner, or situations involving either, in order to assist the insurer in making
any decision regarding a risk. At the same time an agent has the ethical responsibility of full
disclosure to a prospect or client.
STANDARDIZED DISCLOSURE MATERIALS
Disclosure Letters and Disclosure Forms
In disclosing the benefits of an insurance policy, an agent must describe the risks as well.
Agents must present fair product comparisons of products. It is best to keep explanations clear
and understandable and to use written disclosure forms (sign-off forms) and disclosure letters
(follow-up letters) to protect all parties - agent, consumer, and carrier - from misunderstandings.
A disclosure form describes the product being sold and how it applies to the consumer's needs.
This form, which is signed by both the agent and the client at the conclusion of the actual sales
presentation, ensures that all relevant disclosures have been made during the sales
presentation. This includes:
• Information about the insurance company
• A full description of the policy(ies) presented (including exclusions, limitations, and any
charges such as surrender charges or cancellation charges)
• The "free look" period (for life and health policies)
• The Policy Summary (or Outline of Coverage)
• Buyers Guide and other mandatory guides or pamphlets required by state or federal law.
• Any illustrations used (and a statement that illustrations are estimates and not
guarantees of future results)
• A Prospectus (if a variable product was presented)
If the policy is a replacement policy, the sign-off form should attest that all replacement
procedures were properly followed and all replacement forms reviewed and completed.
A disclosure letter can be mailed to the consumer following a sales presentation. It should
summarize what was discussed at the presentation, what types of insurance products the agent
proposed to the prospective client, and what final decisions were made. It is important to
include documentation of the sales process that was used, the risk assessment performed, the
reasons for the recommendations made, any product comparisons that were made, details
about the policies recommended, and discussion of any illustrations used.
Disclosure letters and forms help establish that the agent has explained all product features as
required by state law. They give the client the opportunity to confirm that he or she understands
what has been presented and what has been purchased. They also reduce the possibility that
Federal and state laws regulate solicitations conducted by telephone. Agents who make
telephone solicitations must identify themselves as insurance agents and identify the insurer
Using standardized disclosure materials can help agents assure that they are consistent,
accurate, and complete in the disclosures they make to clients. In some cases, standardized
disclosure materials may be required by state law.
Most of the states in the U.S. require by law that agents provide clients with a Buyer's Guide so
that comparisons with other products may be made for certain types of coverage.
The benefits of providing complete disclosure to clients include the following:
• It builds trust and strengthens the agent-client relationship.
• It makes the agent's work easier, more enjoyable, and more profitable.
• It minimizes the chance of misunderstanding and future conffict.
• It makes the client responsible for the purchase decision, reducing the agent's potential
liability for errors and omissions.
ONGOING SERVICE, ONGOING DISCLOSURE
As long as an individual remains a client, the agent has an ethical obligation to disclose material
information to that client, including a periodic reassessment of the client's needs as well as
updates on the performance of policies in force. Ongoing service and ongoing disclosure
transform a single sales transaction into a lifelong relationship.
SPECIFIC DISCLOSURE ISSUES IN LIFE INSURANCE MARKETING
A number of the issues have a disclosure-related aspect. For example, consider the following.
• Policy illustrations in sales presentations.
• Conflicts of interest.
Adverse Tax Consequences
Agents must be sure to disclose any adverse tax consequences involved in a life insurance
purchase. Such consequences are material to the prospect's decision and must not be omitted.
In our earlier discussion of replacement, we mentioned that agents should evaluate whether a
replacement will result in any taxable gain to the policyowner.
Modified Endowment Contracts (MECS)
Another example would be the funding of a life insurance policy with a large premium in any of
proceeds from a MEC differs significantly from the treatment of loans and surrender proceeds
from a life insurance policy.
• Policy loans taken from a life insurance policy are not considered to be taxable income,
but policy loans taken from a MEC are.
• Partial surrender proceeds from a life insurance policy can be considered a non-incometaxable
return of the policyowner's cost basis until the entire cost basis is withdrawn, but
partial surrender proceeds from a MEC are considered a taxable withdrawal of the gain
in the policy until all the gain is withdrawn.
• In addition, taxable amounts borrowed or withdrawn from a MEC may be subject to a
10% penalty tax unless certain exceptions apply to the policyowner's situation.
The agent should make sure that the client understands these potentially adverse tax
consequences before purchasing any life insurance policy whose proposed funding pattern
would cause it to be considered a MEC.
Using Policy Loans to Create Tax-Free Income
One of the unique tax advantages of cash-value life insurance is that policy loans are not
considered to be taxable income to the policyowner. If the insured dies while a policy loan is
outstanding, the policy loan is repaid with a portion of the death proceeds and none of the
amounts borrowed from the policy ever become income taxable to the policyowner. Under
these circumstances, it is possible for a policyowner to use policy loans from a cash-value life
insurance policy as a source of tax-free income.
However, clients should also be made aware of the potentially severe adverse tax
consequences. If a life insurance policy lapses or is surrendered, any outstanding loan is
considered a taxable gain. Depending on how much was borrowed from the policy, this can
generate a large tax bill. In the case of lapse, the policyowner may be stuck with a big tax bill
and no resources from the policy with which to pay it.
Borrowing against a policy too heavily can cause it to lapse. What begins as an attractive tax
benefit can end as a huge tax liability. To guard against lapse, only a relatively small proportion
of the policy's cash values should be taken as policy loans, leaving substantial cash values that
can sustain the policy in the event the insured lives to an advanced age.
As long as the client has a need for a substantial death benefit, the secondary benefit of using
life insurance policy loans as a source of tax-free income may be worth the risk of the adverse
tax consequences. To the extent the client does not have a need for a substantial death
benefit, the tax risks outweigh the tax benefits. In any case, it is up to the client to decide. If an
agent proposes that a life insurance policy be used as a source of tax-free income, he or she
must be sure to point out the potentially adverse tax consequences as well as the potential tax
a choice of obtaining a benefit payable for as long as they live (single life), or for as long as
either they or their spouse lives Joint-and-survivor).
The benefit based on the joint-and-survivor benefit may be anywhere from 10% to 30% lower
than the benefit based on the single life. If these individuals take the lower joint-and-survivor
benefit and their spouse dies before they do, they generally are still locked into the lower
payment for the remainder of their life. However, if they take the higher single life benefit, these
individuals risk leaving their surviving spouse with nothing if they die before their spouse does.
In some cases, these individuals can resolve this dilemma by insuring their life for an amount
adequate to provide their spouse with a benefit equal to the survivor benefit provided by the
pension plan. With their spouse provided for in the event of their death, these individuals are
then free to elect the higher single life benefit from the pension plan.
Pension maximization can be a great concept, but agents have an ethical obligation to do
thorough factfinding and to fully disclose the elements that may affect the results of a pension
maximization proposal for a particular client.
Agents who use pension maximization must always make sure that the amounts of coverage
they recommend will meet the needs of their clients. They have an ethical and legal obligation
to completely and accurately disclose the costs and benefits of the proposed pension
Perhaps the most important market conduct responsibility for property/casualty agents is
disclosure. Property/casualty agents create coverage for clients based on the client's
exposures. Such agents are advised to write the broadest possible coverage and anticipate
The agent must clearly explain policy provisions such as who is insured (and equally important:
who is not), what is covered, what is excluded, etc. by each policy sold, to ensure that there are
no misunderstandings at claims time.
If the insured declines a particular coverage or endorsements which the agent has
recommended, agents should be sure to get the declination in writing from the insured.
Presentations, Illustrations, and Quotes
It is illegal to induce a client to purchase or replace a policy by using
• presentation materials,
• illustrations, or
that are materially inaccurate.
The presentation is a critical step in the sales process, since it presents the prospective client
with a solution to a need that he or she has. It is the matching of an insurance or investment
product to the prospective client’s requirements.
The most important requirement with respect to product selection is that it must be suitable to
the prospective client's circumstances and needs. When an investment product is
recommended, the NASD’s "Rules of Fair Practice" require that it be suitable for the prospect’s
financial situation and needs. Ethically, this suitability criteria should apply to all financial
transactions involving a financial product considered either a security or insurance.
If the product being recommended is a stock or bond, the sales professional needs to identify it
as such. If it is a mutual fund or a life insurance policy, the prospective client must be informed.
Referring to the recommended product by a name that disguises its true nature to the
prospective client is unethical, illegal and indicates a lack of competence.
Selling often involves educating the prospective client. One common method of educating is to
use analogies to explain the unknown in terms of what the prospect already knows. Analogies
should not be used to explain how a particular financial product works, since this method
involves a high probability of misleading the prospect. The ethical concern is that the analogy
often omits important information leaving the prospect with an incomplete and erroneous
understanding of the product.
Sales professionals selling any product or service are accustomed to making recommendations
for what they sell.
The principal ethical issue is that recommendations can easily be misleading to prospects and
clients. Insurance recommendations are generally based on a needs analysis done for the
prospect. The agent customarily provides a written proposal and a product illustration. The
illustration may be based on a series of assumptions that may or may not be realized. If those
assumptions do not come to pass the results shown on the illustration will not be attained.
When making recommendations and providing illustrations of the products being recommended,
ethically the professional must:
• Make a balanced presentation of both the benefits provided and the cost or risks of
• Identify the risks, if any, to the prospect or client, including the risk that assumptions will
not be realized
• Explain the assumptions upon which the illustration is based and the probable results of
any deviation from those assumptions
• Provide a paper copy of the illustration and recommendation for the prospect
The comparison of alternative investment or savings vehicles must be approached carefully.
• Tax features
• Any other important feature
Life insurance agents customarily use illustrations to sell insurance products. An illustration has
considerable potential for ethical lapses.
The illustration may be used to show the possible growth of cash values, dividends and death
benefits of a life insurance policy or it may show the historic growth of a security. Regardless of
its intent, the important ethical principle is that the information provided must enable the
prospect to make an informed decision.
The prospect must be able to properly assess the product and its suitability for
meeting his or her need. This information is necessary to better inform the prospective client so
he or she will be able to make a fully-informed decision. A fair and balanced comparison that
details the pros and cons of each product, along with a detailed examination of their similarities
and differences, is the only ethical way to do that.
A balanced comparison is one that compares all the important features of the products,
including the advantages and disadvantages of each. It should be obvious that an intentional
misstatement concerning a competing company or product is unethical but it may be less
obvious that the omission of material information would also be unethical and possibly illegal.
The seller must point out to the potential buyer any negative features of the product. Failure to
due so is an ethical breach and may result in the imposition of damages.
A sales professional may sometimes find it desirable to present supporting or ancillary
information to prospects. These supporting illustrations must meet the same requirements as
illustrations provided by insurers. They must be:
• Presented in a manner that the prospect or client can understand.
An unbalanced illustration is one that presents only one side or part of the story, for example
showing the advantages and benefits of a product or strategy without giving equal attention to
any costs or disadvantages. Another type of unbalanced illustration would be one that unfairly
compares the features of one companies’ products to another.
referenced whenever they are used sales professional must put them also in terms and visuals
that the average consumer can understand.
Prospects and clients vary substantially in their level of comfort with risk which applies to the
products they prefer and to the strategies they are willing to implement. When discussing
strategies or products that involve risk, the key ethical consideration for the financial sales
person is appropriate risk disclosure.
The competent insurance agent or registered representative should fully understand the risk
involved with a proposed strategy. The salesperson’s failure to advise the prospective client of
the risks inherent of any recommended strategy is unethical and possibly illegal as well.
Insurance policies are often complex and difficult to understand. Most agents’ presentations
include some standard information regarding premiums, benefits, agent services and
information regarding the company. Usually premiums are the biggest concern of the consumer
and the discussion concerning premiums often takes up a majority of the agent’s presentation.
However, the majority of the E&O claims filed against an agent are related to the policy
coverages and benefits, and how they were explained to the client, particularly the exclusions
and/or limitations in the policy. This is one area where most agents need to do a better job.
Insurance contracts and premiums can be very confusing to the consumer. It is important that
the agent discusses all options with the client and makes sure the client totally comprehends the
The insurance contract is also intimidating to most clients. It is technical, complex, and rarely
read fully by the insurance agent or their client. This is where many misunderstandings take
place. It is important for the agent to stress to the client not only what claims the company is
willing to pay, but also the conditions and limitations in the policy.
When replacing an existing policy the eligibility of an applicant (and their dependents) is always
a concern. Continuity must be taken into consideration when replacing any type of policy. The
existing plan should not be replaced until the new one is in force. The new policy should be
thoroughly reviewed before the existing plan is dropped.
The presentation of a policy is also important, since many consumers do not understand the
insurance business and the terminology involved. The agent needs to present the policy so that
the client can understand all aspects. This is why communication skills are extremely important
in the insurance industry.
Life insurance illustrations show hypothetically how the policy would perform under a given set
of financial assumptions. A copy of any product illustrations shown to prospective clients should
be provided to them for their files, the sales professional should make it completely clear that
the assumptions upon which the illustration is based may not be true in the future. Life
insurance dividends, costs and interest rates will almost certainly be higher or lower than
shown. The non-guaranteed nature of any element in an insurance product or investment must
F:\Books\Ethics & the Insurance Agent.doc 8/17/2005
be clearly explained to any prospective client before any sale takes place.
A life insurance policy in which policy dividends pay the entire premium at some point in the
future is often called “vanishing premium”. The use of such a term, however, is misleading and
should be avoided.
Life insurance agents who propose “vanishing premium” life insurance should illustrate how the
policy would perform if the dividends or interest is actually lower than illustrated. To do that,
agents would be required to run the illustration with a conservative dividend or interest.
Life insurance agents are ethically required to explain that the premiums do not really stop.
Instead, premiums continue, but are simply paid by policy-generated dividends or excess
interest, whose use in that way will reduce the policy’s total cash value. Furthermore, sales
professionals need to explain that premium payments might resume if the declared dividends or
credited interest rate is lower than that shown in the illustration.
A statement that an insurance policy offers income and estate tax advantages could easily
mislead prospective clients. Complete disclosure requires that any mention that any insurance
product is tax-advantaged must include a full explanation of the conditions required to qualify for
those tax advantages
Product Illustrations Provided by the Insurer
Insurer-provided product illustrations usually present few if any ethical problems, because the
insurer that provides them ensures that needed disclosures and explanations are included.
Ethical issues usually arise when the illustration is created by an outside vendor, or by the
insurance agent. Insurers often prohibit the use of any illustrations, unless the sponsoring
company has created or approved them in advance.
Agents should use only the computer illustrations and sales materials provided by the insurers
for each specific product. An agent should not, under any circumstances, use illustrations or
other materials created by the agent, unless the insurer has reviewed and approved them.
Insurance agents have an ethical and legal duty to those companies they represent and could
be held liable for their acts by virtue of the law of agency. In addition agents must be careful to
follow all laws regarding advertising in each respective state. In some cases advertisements
must be approved by the state before they can be used by agents.
Ethical Issues Surrounding Illustrations
An important ethical issue in the life insurance industry is the appropriate design and use of life
insurance policy illustrations. Concern over this issue has been voiced by a wide range of
During the 1980s, the proliferation of computer technology made policy illustrations quickly and
easily available to agents. Running a policy illustration became an automatic part of every sales
proposal for many agents. Running a policy illustration for every proposal is not a recommended
As agents got comfortable using policy illustrations, they moved away from the traditional life
insurance sales process of identifying customer needs and then selling a product to meet those
needs. In needs selling, the death benefit of the life insurance policy takes center stage, and
cash values play an auxiliary role. Prospects are naturally attracted to cash values more than
death benefits, so a lot of life insurance sales began to be made on the basis of those cash
values rather than on the death benefit.
There is nothing unethical about pointing out the living benefits of cash value life insurance, but
it must be done in conjunction with a discussion of the policy's death benefit. Death benefits
should take center stage in an agent's sales approach because the primary purpose of life
insurance is to provide a death benefit. Talk about life insurance cash values is generally
unethical until the need for a death benefit has been established.
In addition to needs selling, agents must make sure that they accurately represent what the
figures in a life insurance policy illustration mean. Agents won't get into trouble if they illustrate
only guaranteed values.
No one can say how different from the illustration actual policy performance may be, or whether
the difference will be favorable or unfavorable to the policyowner. If agents are going to
illustrate non-guaranteed values, the best they can do is to understand the assumptions upon
which the policy illustration is based, and then communicate that understanding to the prospect.
Policy illustrations are used by agents to demonstrate how the cash values and non-guaranteed
elements of a proposed life insurance policy may perform over the life of the policy. While
consumers may fail to read the policy and its accompanying sales literature, they will pay
attention to illustrations, which use charts and graphs to demonstrate how cash values may
grow over a period of time.
Consumers often do not understand that policy illustrations are estimates of what might happen
based on the continuation of a given set of assumptions. Too many assume the numbers used
in sales illustrations are a promise or guarantee of the policy's future performance. And
although sales illustrations are traditionally accompanied by strong cautionary language
indicating that numbers shown are estimates only, consumers often fail to read or understand
Consumers can be led to believe that their policy will perform like an investment product, or that
premiums will "vanish' after a short period (such as 10 years). Many agents have used "current"
values rather than the values guaranteed by the policy (which are much lower) to illustrate
possible future performance of a policy.
Modern technology has pushed this abuse to new levels. It is now possible for agents to sit
down at their personal computers and produce their own illustrations without company review.
Some agents have even gone so far as to exclude the guaranteed column of information to
One alternative to unreliable sales illustrations is to compare companies and policies based on
actual past performance with the caveat that "past performance is no guarantee of future
MAKING POLICY ILLUSTRATIONS MORE UNDERSTANDABLE
There is a wide range of opinions regarding how the life insurance industry should approach the
use of policy illustrations. Here are the pros and cons of a number of these opinions:
• Show Guaranteed Values Only
• Base Non-Guaranteed Values on Actual History
• Prescribe the Assumptions Upon Which Illustrations May Be Based
• Promote More Extensive Disclosure
More extensive disclosure forms describe the distinguishing features of various types of cash
value life insurance (whole life, universal life, variable life) and to mention the external factors
that affect the future performance of a cash value life insurance policy (such as mortality and
investment experience) over which the life insurance company has little control. These
disclosure forms then state which kind of life insurance policy the prospect is considering. They
may also present a verbal summary of the potential benefits the policy may provide. Each time
a non-guaranteed value is mentioned in the summary, it is accompanied by a reference to the
fact that actual experience may produce different results.
A few states require that agents obtain the applicant's signature on a statement attesting to the
fact that the non-guaranteed elements shown in a policy illustration were explained by the
NAIC Model for Policy Illustrations
Concerned that companies and agents were using overly aggressive assumptions in creating
their illustrations, in December 1995 the NAIC adopted a model regulation that provides
illustration formats, prescribes standards to be followed when using life insurance illustrations,
and specifies the disclosures that are required in connection with illustrations. The goal of the
regulation is to make illustrations more understandable, and to make sure that illustrations are
not misleading to purchasers of insurance.
According to the NAIC model, insurance companies must notify the commissioner of insurance
whether a particular policy will be marketed with or without illustrations. If there will be
illustrations, an illustration must be delivered to the prospect, and both the agent and prospect
must sign a statement indicating they have discussed and understand that non-guaranteed
elements of the policy are subject to change and actual results could be higher or lower.
The illustration must include the name of the insurer, agent, proposed insured, underwriting or
rating classification on which the illustration is based, generic policy name, initial death benefit,
and dividend option or application of nonguaranteed elements. The model regulation also
imposes requirements on the insurer to develop more realistic scales for projecting the growth in
Agents are prohibited from representing the policy as anything other than a life insurance policy
(such as calling it an investment product or retirement plan). Agents must take particular care to
describe the non-guaranteed elements (such as dividends) clearly. Incomplete illustrations are
prohibited. Agents may no longer use terminology such as vanishing premium to imply the
policy becomes paid up or that the policyholder can use non-guaranteed elements to pay future
The prospective insured must sign the illustration used during the presentation and copies must
be provided to the insurer and the applicant. Even if no policy illustration is used, both the agent
and the applicant must certify in writing to that effect.
The model also requires the insurance company to provide the policyholder with an annual
report on the status of the policy, and notify the policyholder of any changes that would have a
negative effect on policy values.
Agents should check with their insurers and their state Departments of Insurance to see
whether this model law has been adopted by their state and if it has been modified.
Advice to Agents
Besides adhering to state laws and abiding by the Golden Rule, there are ways for agents to
keep out of trouble. Compliance skills should be learned along with basic product knowledge
and sales skills. Field offices and agencies may establish their own "code of ethics" to be used
in the course of business. Agencies may conduct regular meetings for staff regarding market
conduct and compliance. Agents can also take industry ethics courses to learn more about their
legal and ethical responsibilities.
Agents should communicate frequently and thoroughly with their companies' compliance
departments, underwriting, and claims departments. Direct contact with their divisions of
insurance is also recommended.
Agents must take special care to follow strict procedures (and train all employees to do the
same) in taking applications, placing coverages, explaining coverages, collecting premiums,
submitting changes to policies upon an insured's request, and preparing claim forms.
Agents are encouraged to review their own agency practices, sales materials and sales
practices, and determine whether they are in compliance both with state laws and home office
guidelines. Agents should maintain a file of sales materials that are used and discard any older
sales materials that may be out of compliance with current requirements. (Anything that has
been used as an advertisement or sales material may need to be retained for at least three
years as part of state recordkeeping requirements.) Everything should be reviewed, from
preapproach letters, advertisements, business cards, brochures, etc. to telephone
presentations, data collection (fact finders), illustrations, policy descriptions, receipts,
newsletters, annual policy reviews, and all correspondence with the applicant/policyholder.
Once the agent has identified which materials are out of compliance, he or she should take
EXPLAINING POLICY BENEFITS AND LIMITATIONS
Most presentations involve a few set items, including premium rates, benefits, agent services
and company stability. Of these, the premium amount should be the least important.
In many ways, life insurance policies are more easily understood than other types of insurance.
You buy, you die, it pays! In a medical policy, there may be numerous limitations or conditions
of payment that the consumer (policyholder) has difficulty understanding. They contain such
things as co-payments, stop-loss provisions, elimination periods, plus a variety of other
confusing and easily misunderstood clauses. Any contract can be confusing to the consumer.
and any contract can cause a misunderstanding.
Full disclosure is always necessary in any type of policy being suggested to a client. Where
different interpretations are possible between a brochure and the actual policy, the policy is
always the final authority. A brochure is simply a selling too. An agent who has not read the
contracts he or she is selling, is an agent waiting for a lawsuit to happen.
Whether dealing with a health disability, or life insurance policy, make sure that health questions
on the application are clearly understood and correctly answered. Sometimes an agent simply
is not aware of existing health conditions. If the applicant does not fully understand a health
question, it may be incorrectly answered. It is the responsibility of the agent to present the
questionnaire in a way that is understandable. A policy may be rescinded by the insurance
company for incorrect or undisclosed information. Since these types of misunderstandings can
easily happen, an alert agent will closely monitor the questions and answers on applications.
Some agents are extremely knowledgeable, but they are unable to present their knowledge in a
way that is understandable to the layperson. An ethical agent will put a priority on client
ETHICAL SALES CONCERNS
The important points are:
• The sales professional owes certain ethical duties to clients and employers
• The primary ethical duty owed to prospective clients involves open and honest
communication of all material information so that he or she may make an informed
• Certain acts may be ethical or unethical due to their context; other actions such as
churning, twisting, rebating and the willful failure to obtain complete client information are
unethical, regardless of their context.
• Misleading terms must be avoided at all costs
• Insurance replacement should be recommended only when the replacement coverage is
clearly superior to the coverage being replaced
• Sales professionals must take special care to communicate accurately, clearly and
completely in all phases of the sales process when working with physically or cognitively
In the financial sales relationship, there are duties owed by the sales professional to both the
client and the sales person’s employer or principal. These duties give rise to ethical and,
sometimes, legal obligations.
Agent’s Responsabilities to the Client
The ethical duties that the sales person owes to his or her client generally include the duty to:
• Provide a balanced presentation
• Hold client information confidential
• Avoid conflicts of interest
• Perform tasks with skill and care
• Fully disclose all material information
• Complete any transactions undertaken
Agents have a responsibility to know the differences in products they are selling, and they have
a duty to explain policy options that are reasonably priced and widely available for the policy
In some cases, agents are responsible to see that a policy continues to meet client needs. The
more that the clients depend on the agent for their insurance needs and the longer they do
business with them, the higher the standard of care is in selling and serving them.
Reasonable Client Expectations
It is not only the actions of sales professionals that determine their ethics. Prospect or client
expectations are also involved, as long as those expectations are reasonable. Following are
three reasonable expectations that clients have:
• Recommendations from the sales professional that meet the clients’ needs in ways that
are suitable and appropriate for their needs and goals
• The maintenance of proper coverage for their needs
• Clear and specific information and communication
Meeting the Client’s Needs in a Suitable Way
Financial sales professionals are ethically obligated to make recommendations that are
reasonably capable of meeting the prospective client’s needs, and suitable for him or her. The
failure to obtain agreed-upon coverage for the client often results in charges of unethical
practices, particularly in property and casualty insurance.
Maintaining Proper Coverage
In the insurance business, the agent’s failure to maintain proper coverage is another area in
All clients have a reasonable expectation that they will receive clear and unambiguous
information concerning products recommended to them. In addition, they expect that they will
be informed of all material facts before making a buying decision.
WHEN THE AGENT ALLOWS MISCONCEPTIONS
Unfortunately many policies are sold on the basis of assumed facts or misconceptions. The
agent may not have outwardly misled consumers, however, they allowed the consumer to make
assumptions that were incorrect. Some misconceptions may cause serious legal problems.
A policyholder that knows a specific claim will not be paid is not likely to be upset, but a
policyholder that thought a specific claim would be paid will be very upset when the claim is
denied. That policyholder will probably feel the salesperson misled them or failed to fully
disclose the conditions and limitations present in the policy.
Working with Seniors or Disabled Clients
Although individuals may suffer cognitive or other impairments at any age, sales persons
working in the senior marketplace are more likely to encounter clients with such impairments.
Working with the impaired client requires that the sales professional take special care to
communicate in all phases of the sales process.
The sales professional must take particular care when working with the impaired client in:
• Obtaining information
• Making recommendations
• Implementing plans
Obtaining Information from Seniors
The requirement that recommendations be suitable increases as the prospective client ages or
becomes impaired. However, ensuring suitability may be somewhat more difficult when the
prospective client has an impairment that affects his or her ability to hear, read or understand.
The sales person must be able to communicate adequately with, and obtain needed information
from, the prospective client. Prospective clients with cognitive disorders present the greatest
challenge to the sales person. Individuals whose hearing or vision is severely diminished, also
require special care. Some impaired individuals may be uncomfortable admitting their limitations
which presents the sales professional with even greater difficulty.
Ethically, the sales professional working with an impaired individual must make every
reasonable effort to ensure that he or she is understood. Often, the sales person must confirm
the prospective client’s understanding.
If the sales person knows or suspects that the prospective client is not fully in possession of his
or her mental faculties, or has difficulty hearing or seeing the sales person working with an
impaired individual should:
• Confirm that the prospective client understands the questions. Confirming
understanding may require that the sales person not only explain the questions
verbally, but also provide them in writing.
• Document the prospective client’s responses by writing them in a pre-printed form.
When the data-gathering session is concluded, the sales person should present the
completed data-gathering form to the prospective client and recap the questions and
answers. When the sales person and the prospective client agree that the information
on the data-gathering form is correct, the sales person should ask the prospective client
to sign or initial the form so indicating. (A copy of the form should become a permanent
part of the client file.)
• Request, if appropriate, that other individuals who have no vested interest in the sales
process or its results accompany the prospective client, such as caregivers, family
members or other trusted advisers, the individual’s accountant, attorney, financial
planner, pastor, etc.
Making Recommendations to Seniors
Although many seniors continue to function well mentally, emotionally and physically well into
advanced age, for others impairment may be an unwelcome companion of becoming older.
When impairment results in diminished cognitive abilities or a loss of vision or hearing, it places
even greater ethical responsibility on the sales professional to ensure that recommendations are
In a meeting with an impaired prospective client in which recommendations for purchase are to
be made, the sales person should suggest that any family members or trusted advisers be
Begin the meeting by reviewing the completed and signed data gathering form used to discover
the client’s needs and develop the recommendations being presented.
Next distribute and review a written copy of the recommendation being made including how the
recommended product will satisfy each of the prospect’s needs.
Implementing Plans for Impaired or Disabled Clients
Chief among the considerations in implementing a chosen plan for an impaired client is
communicating with both the client and his or her advisers.
Implementing a recommendation could take several months or longer and may involve several
different professionals. The sales person needs to remain involved in the process, even after
the product is purchased, to ensure that each required step is accomplished and appropriately
When ongoing premium payments or investments are required to complete or maintain the
implemented plan, ensuring that those subsequent premium payments or investments are made
is critical. Since the impaired client may forget to make needed payments or additional
investments when required, it is important to provide premium notices to others such as family
members, caregivers or professional advisers so they can can take remedial action to ensure
Ethical Concerns in Implementation and Follow Up
Many ethical issues arise out of the sales professional’s conduct following the sales interview.
Principally, these are the two critical problem areas:
• Failure to obtain proper coverage
• Failure to maintain proper coverage
• One or more of the following usually causes the failure to obtain coverage:
• A failure to properly analyze the client’s situation and the risks involved
• Failure to request the proper coverage
• A delay in requesting any coverage for a period of time
• Not receiving the proper coverage from the insurer
• Failing to maintain coverage usually occurs because of the insurance agent’s failure
• Renew coverage on a timely basis
• Notify the insured of the deadline for renewing coverage non-renewal
KEEPING IN TOUCH AFTER THE SALE
The hardest policies to replace are those of an agent that keeps in touch with his or her clients.
Aside from the business retention standpoint, an agent's ethical duties regarding service after
the sale often depends partly upon the arrangements made between the agent and his or her
agency or insurance company. Some companies have a separate servicing staff so that the
selling agent is not expected to do any further service work. Most agents, however, are
probably expected to do any necessary service work personally. Even if the selling agent is not
expected to do so, most professionals find that referrals and additional sales result from close
client contact. In addition to that aspect, everyone likes to feel that they were more than a
commission to a salesperson.
CONSEQUENCES OF BREACH OF RESPONSIBILITY TO CLIENTS
An agent who breaches his or her responsibility to clients to behave in an ethical manner will be
exposed to two types of consequences, Personal and Legal. Depending upon the seriousness
of the breach, the agent may suffer anything from loss of a client to loss of a job, or even
criminal and/or civil prosecution.
High pressure tactics give the insurance field a bad name, which ethical, professional agents
then must overcome. And agents who can use high-pressure tactics to achieve their own ends
may eventually have their license suspended or withdrawn.
Since public trust is so essential in the insurance field, high-pressure agents who do not fit in
with the professional image their company or agency wishes to convey may be asked to stop
representing the company, or leave the agency.
Most agents are familiar with the term fiduciary duty. Fiduciary duty of the agent prevents him
from competing with the principal or from making a "secret profit" other than what is stipulated or
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.
The duties of an insurance agent to his or her insurer are established by the concept of agency.
This concept is represented by the agency contract, which both parties agree to and sign. As
representatives of insurance companies, agents may be granted wide authority. Within the
scope of that contract, the insurance agent owes to his or her insurer the duties of honesty,
good faith and loyalty. He or she also is obligated to reveal to the insurer all material facts
concerning the agency relationship.
In carrying out his or her duties, the insurance agent is the direct representative of the insurer.
His or her day-to-day activities are a direct reflection on the insurer's image within the
community. Consequently, the agent is obligated to do the best job possible, with sincerity,
integrity and technical competency. If the agent makes mistakes, then the agent may be liable
either to the client or the insurer for any damages that result.
The agent's contract or agency agreement with the insurer will specify the agents duties and
responsibilities to the principal. The contract will identify the parties in the contract, the
contract's expiration or renewal date, and the extent of the agent's authority.
In all insurance transactions, the agent’s responsibility is to act in accordance with the agency
contract and thus for the benefit of the insurer. If an agent violates the agency agreement, then
he or she may be held personally liable to the insurer for breach of contract.
The agent's actions are considered by law to be those of the principal when the agent is acting
within the scope of his or her authority.
Since an insurance agent acts for the insurer/principal, in the minds of clients, the insurance
agent often becomes the company. Because contact is only with the agent, the agent has a
serious ethical responsibility to do nothing which will cause harm of any kind to the principal.
An agent must ethically give the insurance company all facts considering the insured that are
pertinent to the issuance of the policy, but on the other hand, the agent also owes it to his or her
client to give them all the pertinent facts regarding the insurance company. The agent has an
ethical duty to both the insurance company and the policyholder.
Duties to an Employer or Principal
In a legal sense, insurance agents or registered representatives must act in the best interests of
the principal. Sales professionals owe certain duties to their employers, as well as to clients,
• Careful solicitation
• Loyalty and full disclosure of any material information
• Proper accounting for funds
An agent has the ethical duty to protect the insurer's interests by soliciting business that
appears to be good and profitable for the insurer. The obligation to exercise reasonable care in
soliciting quality business is obvious.
Once an agent has taken an application, he or she has the duty to submit it, even if it appears
that the applicant may be a poor or uninsurable risk. For example, if an agent may have some
misgivings about whether the applicant is being completely truthful, the agent may be reluctant
to submit the application to the company. However, it is his or her duty to do so. Whether or
not a policy is issued is a decision for the insurer's underwriters. The agent must however
provide full information to his or her insurer so they can decide whether or not to accept the risk.
The agent has a duty to solicit business carefully meaning that:
• Any insurance or securities recommendation must be suitable in relation to the
prospective client’s financial situation, objectives and tolerance for risk
• Any risk submitted to an insurer must be consistent with its published underwriting
standards and philosophies
Loyalty and Full Disclosure
In the insurance business, the duty of loyalty includes an obligation to fully disclose all material
facts. The duty of full disclosure is particularly important to insurance companies to adequately
underwrite new risks, and appropriately handle claims.
The primary ethical responsibility an agent owes to the insurer is loyalty. This means that he or
she must, at all times, act in the insurer's best interest in every matter involving the insurer's
business. An agent cannot act for himself or herself, if contrary to the insurer's interest.
For instance, in many agency relationships, unless the agent is specifically authorized to do so,
he or she cannot represent competitors of the principal. It is quite common, however, for
independent insurance agents and brokers to represent several insurers with the full knowledge
and consent of the other insurers.
An agent is also charged with adhering to the limits of his or her authority and staying within the
guidelines of the agency contract. For example, except for the compensation specified in the
agency agreement, an agent cannot earn additional profits from the agency relationship by
using the principal's name for personal gain.
Money management is a part of each everyone’s lives and they must learn how to balance this
with the rest of their responsibilities to make sure they are all in line with their core values and
goals. This balance includes managing many things, including money. Insurance agents are no
exception, especially agents whose compensation is based on commission sales.
Insurance agents who are in commission sales must be disciplined in money handling. There is
a high failure rate among those who work in commission sales because they lack the discipline
and knowledge necessary about handling personal finances.
Proper Accounting for Funds
Collection of Premium
Agents must be particularly honest and ethical in handling any premiums they may collect.
Agents should never accept cash payments from insureds. Cash makes the recordkeeping
function more complicated, makes commingling of funds too tempting, and opens the agent up
to claims of wrongdoing if the insured asserts he or she paid the agent more than they actually
did. In some cases it is safest to accept premium payments as checks made out to the issuing
Agents frequently collect premiums from insureds and applicants, and receive return premiums
from insurers. It is the agent s duty to make certain that these premiums are submitted to the
appropriate party promptly. All insurance related funds received by an agent are received in a
fiduciary capacity and must be held in trust. An agent may establish separate bank accounts for
fiduciary funds, or may deposit all such funds in a single account - in either case the agents
records must clearly distinguish the amount of funds held for each person. Agents should
consult their states laws for legal requirements regarding trust funds and trust accounts.
The agent must account for and pay the correct amounts to insureds, insurers, and others who
are entitled to the money. These funds should not be mixed with personal funds. Mixing
personal funds with the insured or insurer's funds is an illegal practice known as commingling.
Any agent who uses funds held in trust for personal use is guilty of theft or misuse of funds and
will be punished as provided by law. Usually a misuse of funds is punishable by suspension or
revocation of license, and fines and imprisonment may also be imposed.
One of the powers that life insurance companies, as principals, generally grant to their agents is
the power to collect premiums (at least initial premiums). At the moment a prospect gives an
initial premium to an agent, the company is considered to have received that premium under the
laws of agency. Agents who are irresponsible with premiums, whether intentionally or
unintentionally, violate not only ethical standards, but also the law.
In most states, an insured may be billed for insurance coverage in one of two ways: (1) the
insurance company may invoice the insured and the premium is sent directly to the company; or
(2) the insurance agent or broker may invoice the insured and the premium is remitted to the
agent or broker. Most agents and brokers are authorized to collect initial premiums from
applicants when the application for insurance is completed. Some are also authorized to
invoice and collect renewal premiums on behalf of the insurer.
The usual practice for most life insurance agents is simply to turn all premium money over to
disposition of all outflows. Agents must be sure to comply with all laws and rules regarding the
handling of premiums, because violations are a breach of the agent's fiduciary duty even if no
harm to a client is done or intended.
By law, payment to an agent is payment to the insurer. The agent has the fiduciary duty to
account for all funds he or she receives in connection with the insurer's business, and to turn
these funds over promptly. Even if there is no illegal intent, it is unethical to delay or withhold
premium payments. In many states, it is illegal to combine premium monies with personal funds
and rarely would it be ethical to do so, whether or not such a specific law exists.
Every agent should understand the hazards of commingling funds. While state laws vary, the
basic concept is that insurance funds and agency funds should never be mixed. Two separate
accounts must be kept, one for their personal account and one for their insurance account.
Most professionals have an operating account and a trust account. The trust account is used
for funds that do not belong to the insurance agent or the insurance agency. The operating
account is used for commissions that are due and payable to either the agent or the agency.
The operating account is used to pay the operating expenses for the agency. The trust account
holds funds "in trust" for either the insurance company or the policyholder. Any agent that is not
clear on this should contact their state's insurance department for that state's specific
All states have laws that regulate the sales and marketing practices as well as the licensing of
brokers and agents. If the agent is incompetent or dishonest, the state insurance commissioner
has the authority to suspend or revoke the agent's or broker's license; this provides powerful
control over the insurance producer's behavior.
Though state laws regulating sales and marketing practices by insurance agents vary, there is a
great deal of uniformity in the principle and intent of these laws. All are designed to protect the
interests of consumers by ensuring fair, reasoned and ethical conduct by an agent.
The insurance agent has more control over the public's attitude toward insurance than do sales
representatives for most other consumer products. This is because the insurance agent often
initiates contact with a prospect, determines a prospect's need for insurance, recommends a
certain product or solution, makes the sales presentation and develops a long-term relationship
with after-sale service. In many cases the prospect has little or no contact with the insurance
Because this unique relationship involves a great deal of contact between the consumer and
agent (and because the public generally understands very little about insurance), public
perceptions of the insurance industry itself are based on how well-or how poorly-an agent does
his or her job. Thus, the professional insurance agent has two ethical responsibilities to the
• to strive for an equally high level of professionalism in all public contacts in order to
foster and maintain a strong positive image of the industry.
Ethics & Competition
Agents often feel that many of the ethical challenges confronting them stem from two sources:
competition and the stress of meeting performance quotas (sales). The intense competition
within the insurance industry as a whole forces management to look at the bottom line, creating
a conflict with business ethics, as does the competition agents face individually. Furthermore,
the practice of measuring performance on the basis of end results and production quotas poses
a challenge to ethics since the result is considered more important than the means.
Insurance professionals must often compete with other agents or brokers who are less
principled than they should be. These agents may offer false or misleading representations of
products or services due to the temptation for financial gain (or other personal benefits).
The insurance industry is highly competitive. For an agent, there is ample opportunity to
conduct business inappropriately at the expense of a competitor. Misrepresentation or
defamation of a competitor's character reflects negatively on the entire industry. As a duty to
his or her insurer and to the industry itself, an agent must resist this temptation. Ethically an
agent should acknowledge the worth of other agents and their policies, and compete only on the
basis of the value of the products and service he or she can provide.
Unethical behavior tends to rise as the industry becomes more competitive. Unfortunately some
insurance agencies push competitive sales contests and look the other way when activities
seem to compromise ethical behavior. When unethical behavior is rewarded (as with prizes or
additional commissions) it further erodes ethical standards and when unethical behavior is
punished, unethical behavior was deterred.
Many people may compromise their ethical beliefs to achieve success in business under
pressure. Unfortunately an honest and ethical individual can be influenced by unethical
pressures especially in the workplace. In today's society, many families need two incomes for
support and feel that if they lost their job, they would be unable to survive financially. Under this
pressure, many people are inclined to participate in an unethical act just to keep their job. In
addition, unethical behavior is often more prominent in professions which are highly competitive.
This competitiveness may be why some insurance agencies turn their head when unethical
behavior occurs. In businesses where unethical behavior is disregarded or is rewarded it is
more likely to continue.
To succeed in business takes a lot of hard work, knowledge, skills, and self-motivation.
Sometimes the pressures of these demands make it tempting for someone to take an ethical
shortcut, but the pressure to perform can never justify an unethical act.
An agent might be tempted to resort to unethical actions when his or her production goals are
too challenging. Production goals must be based on the assumption that ethical actions will be
taken to reach them.
An agent's pressure to perform may come from an internal drive to succeed. There's nothing
objectives and a desire for success are positive factors in themselves. However success can be
reached without violating ethical boundaries.
Ethical trouble may arise when an agent views insurance sales solely from the standpoint of
self-interest. There's nothing wrong with earning a commission on the sale as long as they are
providing value to the client in return for that commission. The transaction must serve the
customer's best interests as well as the agent's. The agent might base a recommendation to
purchase a large amount of coverage solely on the basis of his or her commission, rather than
on the individual's needs. Or the self-interested agent might recommend a high-commission
product when the prospect would be better served by purchasing a product that pays a lower
Taking the ethical path isn’t always easy. Sometimes being ethical means taking a risk of losing
a sale to a competitor who isn't acting ethically. That's hard to do. If a competitor isn't being
ethical, it may be tempting for an agent to "level the playing field" by acting unethically, too. It
may seem "fair" to act unethically in such situations, but it certainly isn't right. The best course
of action in any situation is to stay firmly within the dictates of ethics and realize that in the long
run this will bring success.
PROMOTING ETHICAL BEHAVIOR
The more complex society becomes, the more necessary it is to teach ethics to both
professionals and to the general population. In the past, ethical behavior was primarily taught to
children by their parents and by churches to their congregations. As our families become more
complex and spread out, these teachings seem to be diminishing.
Another factor in the decline of ethical behavior, involves the use of technology. When one
deals with people over the telephone or through a computer, dishonesty tends to increase.
Apparently it is easier to be dishonest when we are not face-to-face.
To preserve ethical behavior, it is necessary to maintain a corporate climate that rewards ethical
behavior and punishes unethical behavior.
Why would anyone want to do business with someone they know to be unethical? Would they
do business with someone who knowingly lied to others simply to make a profitable
commission? Would they use an insurance broker who was dishonest and misrepresented his
or her clients? Ethics are the only element, other than legal mandates, that add an element of
trust to many industries.
Ethics creates trust in relationships in all areas of life. Ethics comes from within an individual
and challenges them to do the best job they can and helps them maintain high ethical standards
Even though different conclusions may be reached to the same ethical question, it does not
mean that one solution is right and another wrong. Ethical questions often have multiple
answers, all of which may be correct. Some decisions may be based solely on facts, while
others may be based less on facts and more on emotional factors (or what simply feels right).
Ethical individuals always take into account other people and the effect their decision will have
on others. Although everyone must look out for their own interests, this does not mean making
unethical decisions. Even commission salespeople are able to make a very good living while still
maintaining ethical behavior. In fact, the best salespeople are often the most ethical.
Everyone’s interests are tied to the interests of others. The insurance agent who is not ethical
will, at some point, find making a living impossible because no client will wish to deal with him.
People are better able to achieve their goals when they recognize the goals and interests of
others. Unethical behavior is ultimately self-defeating.
The insurance profession has been labeled by many as lacking ethical standards. Unfortunately
the few "bad apples" in the industry cause people to think the whole industry is unethical. This is
true in many professions. All around the world people disagree on what is "ethical." What one
society may view as ethical another may not. Even people within a society may disagree on
The part of the insurance industry dealing with senior products has received especially bad
publicity. Part of this has to do with the age of the consumer, and because the older population
controls most of the nation's wealth.
Everyone, regardless of their occupation, faces ethical issues on a daily basis. However, those
in an occupation that has a "public interest," like insurance professionals, are especially prone
to ethical issues. Ethics are standards to which an insurance agent or broker must aspire. It is a
commitment to each client.
The ethical person knows right from wrong and chooses to do the right thing. Ethical individuals
believe in doing what is best for all involved. In the insurance industry the ethical agent or broker
will work to do what is best for their client whether or not it provides him with a commission.
Though insurance is something that all people need for themselves and for their families, many
people do not realize the importance of insurance and therefore don't purchase it. It is important
that those working in the insurance business go the extra mile to help others realize the
importance of insurance using their education and communication skills with their clients.
The Agency Environment
Insurance representatives are often a reflection of what is going on around them. If they are
surrounded by people who are primarily concerned with themselves, it is likely that they will
have that same attitude. If the agency in which they were trained stresses sales, without regard
to other issues, it is likely that they will loose sight of the role that ethics should play. When
ethical behavior is not deemed important by their employers or peers, it is not surprising that
ethical problems arrise.
Not everyone believes it is in their own self-interest to be ethical in their behavior. An agent who
has never considered ethical behavior might begin to do so if the agency where he or she works
has a strong emphasis on ethics. Agencies must make the effort to emphasize ethical behavior
because there will always be agents who will respond favorably to such efforts. Companies and
agencies must be viligant to ensure that all employees are in compliance with the firm’s ethical
It is also important for people to know why they are doing what they do. For insurance agents,
that means understanding why the industry and services are valuable. If their agency has lost
sight of ethics chances are their agents will not know why they are doing the job beyond making
money. When an agent feels that their role day-in, day-out is primarily connected to making
money without any regard as to how the money is made, ethics can easily be forgotten.
Though agents need to consider who they work for in conjunction with their behavior they also
have to take responsibility for their own actions and decisions. If an employer is only interested
in obtaining new business and increasing profits it is difficult to maintain a high ethical standard.
When people feel that they are only there to making money without any consideration as to how
the money is made, ethics is pushed aside. Ethical behavior is possible regardless of what their
A business owner must be aware that without employees who are ethical, the only restraint is
the law. Without ethics, business transactions could not be trusted. It would certainly cripple a
business if employees could not be trusted. On the other hand, employees must also be able to
trust their employer to be ethical. Those who own and manage the business must also be
Above all, ethical agents stress the need for an agency environment that does not encourage an
agent to compromise his or her ethical standards just to achieve a goal.
A basic question is whether or not insurance companies and management staffs actually value
ethical behavior in their field force. While most people feel that practicing good ethics is also
practicing good business, many agents feel that there is little, if any, recognition for ethical
behavior or practices. Insurance agencies seem uncertain how to reward, or even recognize,
ethical sales practices in their field agents.
Underwriters value ethical behavior because it is necessary in order for them to underwrite the
policies effectively. When an agent has a reputation for giving solid information, the
underwriters are likely to do a better job for that agent in terms of time and judgments. On the
other hand, when underwriters know an agent consistently omits needed information or
misrepresents the information given, then underwriters are much more likely to question every
aspect of that agent's submitted applications. Certainly, this is one way that, ethical behavior is
Often people are not aware of the influence that their jobs, and those they work with, have on
the way they think and act. They think they are capable of maintaining their identity without
allowing others to influence them. Even though many thought patterns and work habits are
formed over time and may be difficult to change, they are constantly influenced by others, just
as they are constantly influencing others. Each person may be highly influenced by what
happens to them day-in and day-out in their jobs. That is why it is so important to carefully
choose where they work, and with whom they work.
There is no denying that the workplace has a great influence over who people are. This may be
even more so for insurance agents than many other professions. Since agents work on
commission, they must produce or they may not get paid. The financial pressure can cause the
A work atmosphere that is kind and considerate, education oriented, and cooperative can go far
in securing ethical behavior practices. However, when an agency is investing heavily in its
sales force, it is likely that production is a major criteria for those employed there. Certainly
there are agencies that promote both sales and ethics. It is likely that new agents become more
ethical just by being exposed to those who work there (just as others will become less ethical in
the opposite type of atmosphere).
Agents may be shown sales techniques and tactics that do not have the client's best interest at
heart, but rather are intended to increase sales. They see others rewarded for sales volume,
perhaps without regard to quality of service, which puts a tremendous amount of pressure on
them to behave unethically. And the fact that their paycheck may be based on commissions
from sales creates an environment that can cause even the most ethical person to be tempted
to behave unethically in order to make a commission.
Unfortunately people may make a job decision based solely on the salary or commission plan
offered. Though they need to pay their bills, this is when they may get greedy and ignore certain
attitudes and negative feelings about a possible employer and think that a large paycheck will
provide job satisfaction and happiness.
Some people develop by imitating and repeating the actions of those around them. This is why
it is so important that insurance agencies make ethical behavior a priority in the workplace.
Some people who do not make ethical choices may be motivated to change by mirroring the
actions of people around them who do. This is why it is so important that businesses make
ethical behavior a priority in the work place. One bad example can cause poor behavior in many
It is always a challenge to do the right thing in a competitive environment. But, each time
people make a decision to stand for what is right they reinforce their own moral character and
influence others. History is made and lives are changed, not by those who follow the crowd, but
by those who are prepared to take the ultimate risk and stand up for what is right.
Successful agents are influential in the ethical conduct of other agents. The celebration of the
ethical behavior of producers should be at least as elaborate as the celebration of their sales
production. Just as important as celebrating ethical standards, ethical misconduct should be
punished consistently and harshly, regardless of the production performance of the offender.
The activities and policies of a business tell the employees what the firm's underlying values
actually are. Regardless of what is written in the employee manuals or company mission
statement, actions reveal more about a business than executive speeches or advertising
campaigns. The employees will judge the company by the way they are treated individually.
People are more likely to voice ethical behavior than follow it. A person’s identity is established
by what they do and by what they do not do. Seldom are they formed by one single experience
although one single experience, if great enough, can change their direction or focus in life.
Without even noticing it, one can slip into a pattern of behavior, which ends up being the basis
by which they are judged by others. A code of ethics must be a goal that people deliberately
When success in the workplace means compromises in ethics and values, that often means that
people are allowing their employees, employer, or coworkers to define who they are rather than
defining that role themselves. In an effort to move up the corporate ladder, people occasionally
lose track of why they do the things they are doing. To discover the role that ethics or values
play in their work, clear and distinct goals are crucial so that they don't lose sight of what's really
important in their lives and their work.
Reasons to be Ethical
The most important reason to be ethical is that people are a reflection of their lives, their work,
their families, their community and of themselves. Their children will copy them, their families
and communities will be affected by their actions and they, themselves, must live with who they
are yesterday, today and tomorrow. Those around them, including their coworkers, are affected
by their values and ethics. When their character is something they are proud of, it will show in
their daily behavior, which includes their work. This will bring self-assurance, which will
ultimately benefit them in many ways, including financially. Personal integrity radiates
confidence and everyone prefers to deal with people who seem confident.
When an agent understands the role they are playing in another's life, the satisfaction gained
goes hand-in-hand with ethical behavior. Clearly defined goals and purposes are essential for
people to understand what their lives in general and their work in particular are really all about.
LONG TERM vs. SHORT TERM
Ethical behavior tends to have long-range (versus short range) benefits. In the short term, it is
often advantageous financially to make the sale no matter what tactics are used. In the long
term it is more advantageous to behave ethically even if that means forgoing the sale. When an
individual is financially stressed, it is more likely that he or she will ignore the ethical
requirements making the financial gain the top priority. This applies to both individuals and
businesses. When an agency or other type of business is struggling, their first concern may be
profits rather than ethics. That is why salespeople must use some thought regarding whom they
choose to work for.
Things often look different in the long run than they do in the short run. One of the most frequent
causes of unethical behavior is the continuous pressure for immediate results. When people
are under extraordinary pressure to meet deadlines, to attain short-term goals, or to focus totally
on either profits or cost reduction they are forced to make choices that are often destructive over
the long run.
An ethical person must often sacrifice short-term benefits to achieve long-term advantages.
They must all be prepared to sacrifice physical or material gains for abstract intangibles like selfesteem,
respect of others, reputation, and a clear conscience. They must also work at creating
The really difficult ethical decisions are those where one ethical value must be selected over
another. In these cases, it is especially important to have a long-term focus. What seems
When an industry seems to be involved in widespread illegal and unethical behavior the cause
is nearly always greed. This affects even the ethical person who simply happens to work in the
industry. When an industry is perceived to be dishonest, the ethical individuals often finds
themselves tainted by the activities of others.
America's values are changing as well. Americans have become a nation of buyers where they
were once a nation of savers. Pleasure today is promoted over financial security tomorrow.
Without a system of values, individuals may come to feel that society owes them a comfortable
retirement. This rationalization allows people to spend today without worrying about tomorrow.
Self-discipline and self-control have given way to self-fulfillment and material consumption. This
applies not only to individuals. Businesses have also fallen prey to material consumption in the
past. Material consumption can often be translated into one general word: greed.
Most agencies have invested considerable time and money in their agents, so it is important
that they succeed. In addition, the future of the agency depends upon the production of their
sales force. Promoting a materialistic self-serving method will not only cause frustration for the
agents, but it may also side track the agency from attaining its goals.
Those who make a job of motivating salespeople often portray greed as something that is
necessary in a capitalistic society. A person who is motivated only by greed cannot survive longterm.
Greed too easily becomes destructive, moving beyond what is healthy and motivational.
Greed and ethics simply cannot co-exist.
There will always be traces of greed in everyone. When greed becomes a motivating factor,
however, it is dangerous to others and ourselves, as well. For companies or agencies to
actually promote greed is unethical.
Too often people have been brainwashed into thinking that material rewards are the goals that
they need to achieve in life in order to be happy.
It has become commonplace for insurance companies and other industries to shower their
salespeople with prizes, plaques and medals for selling their products. Companies seem to
believe their employees will work only for material gratification. Employees may begin to do
their work for the wrong reasons. Financial rewards are essential, but when ethical behavior is
not tied to those financial rewards, many negative circumstances can develop.
Employees may do their work for the wrong reasons and their normal code of ethical behavior
may become lost. When work volume is joined to financial rewards the goal becomes volume of
sales and not necessarily determining the best product for the client.
Encouraging financial gain exclusively is also a disservice to clients because it implies that their
function is to provide the money necessary to meet the company's material goals. When there is
no thought given regarding whether the client can afford the service being provided or if the
client will benefit from the product, then the company is not behaving ethically.
motivated by greed often will not survive in the long run. Greed is a desire that is never satisfied
and can eventually cause destruction. Greed goes beyond motivating. Greed and ethics cannot
All people have some amount of greed and self-interest within them, however, an ethical person
will suppress their own greed and self-interest and do what is best for all. For people faced with
alternatives when it comes to decision-making, it is not always easy to decide which choice is
best and ethical. Without a standard of values, ethical choices would be very hard to make.
ETHICS FOR INSURANCE BROKERS
Unlike an agent who represents an insurance company or companies, a broker is someone who
legally represents the insured. A broker places business with more than one insurance
company. Although a broker does not have the authority to legally bind the insurer, he or she
can solicit and accept applications and then attempt to place the coverage with an appropriate
insurer. Coverage is not effective until the insurance company receives an application and
accepts the risks. Many insurance brokers are also licensed as agents and may bind insurance
coverage in their capacity as an agent. States have varying laws regulating fees that brokers
can charge and other aspects of the broker-client relationship.
In most, if not all, states the word “broker” refers to a specific type of license which can only be
issued to property-casulty producers. Life and health insurance agents who represent more than
one insurer are often erroniously called “brokers” when in reality they are “independent agents.”
THE INSURERS RESPONSIBILITIES TO POLICYHOLDERS
An insurer's reputation is one of its greatest strengths, and high ethical standards are the
cornerstone of that reputation. Each insurance company should attempt to meet its obligations
in an ethical manner which earns the respect of policyowners, clients, regulators, employees,
business associates, and the community. The insurer's employees and agents contribute to the
high ethical standards of the company and continue to enhance its reputation and image.
To accomplish these goals, the insurer attempts to:
• Conduct its business in a fair, lawful, and ethical manner
• Offer customers those products and services which are appropriate to their needs and
provide fair value
• Maintain a climate which encourages agents and employees to be honest and fair in the
conduct of their duties
Policyholders may expect the insurer to comply with those laws and regulations pertaining to
policyholder service such as fair sales and marketing practices, fair underwriting practices, fair
claims practices, and fair notice of policy cancellations and nonrenewals.
Policyholders also have the right to expect the insurer to comply with broader insurance laws,
since ultimately violations of these laws result in some impact on the public. For example, an
Due Diligence in Hiring Agents
Studies show that while the public's view of insurance agents in general is poor (somewhere
below lawyers and used car salespersons), in general, however, the public holds their own
personal agent in high regard.
The truth is, there are plenty of good agents out there, providing excellent advice and service,
clearly explaining the policies they sell, and fairly representing their insurance companies. It's
the poorly trained, dishonest, self-serving agents that give the insurance business a bad name.
Insurance companies can be held partly to blame for these problems. Insurance agents are
recruited from a wide range of sources, sent through selection and screening processes,
trained, licensed, and rushed into the field where immediate sales are demanded. The result is
often a staggering turnover. In the life insurance industry, only 20-25% of agents last four
years or longer
Insurance companies owe it to their policyholders to recruit and hire competent insurance
agents to represent their products to consumers. Stringent selection standards are in order,
particularly in conducting background checks and following up on employment histories and
references. Many companies are developing "due diligence" committees that oversee the agent
Unfortunately, companies take an equally big risk when they hire new, inexperienced agents as
they do when they hire experienced agents who may be changing companies. Recruits who are
properly investigated, properly trained, properly motivated, and provided with adequate support
systems can succeed. Since insurance companies are being held liable for the actions of their
agents they are being much more careful about recruiting, hiring, managing and disciplining
their agents now than in the past.
State Requirements for Background Investigations
State guidelines for appointing new agents vary, but basically all require the company to certify
the prospective appointee's "trustworthiness, suitability, and competency" prior to appointment.
Some states also require companies to certify that an investigation has been completed as to
the character and ability of the applicant and certify that the company is satisfied that the
applicant is "of good moral character, financially responsible, and trustworthy." Others go so far
as conducting their own criminal and/or credit background investigations of new or newly
The Federal Crime Bill of 1994 imposes criminal penalties on anyone who allows a person
convicted of a felony, or an act involving dishonesty or breach of trust, to participate in the
insurance industry. A national search for background information such as this could cost
thousands of dollars per applicant.
Just conducting a criminal background check may not be enough. Some insurers report they
see a correlation between an applicant’s credit history and future agent behavior.
Carriers use the information from background investigations to help ensure a high-quality
distribution force. This not only helps protect companies from regulatory, legal, and other
market conduct problems, it helps keep unscrupulous agents out of the business and away from
By conducting background investigations, and gathering information about the potential agents
financial history (including bankruptcies), criminal history, civil litigation history, education
history, military record, employment or contracting history, insurance licensing history, and
securities licensing history, carriers are better able to make informed decisions about appointing
their agents. Most agents support the use of background investigations because they help
ensure that good agents won't have to compete with unethical or underhanded competition.
Complaints and Agent Conduct
In most states companies are required to maintain a complaint register that records all
complaints as well as the insurer's response and final disposition of the complaints. Each
insurer should have complaint handling procedures that have been clearly communicated to
policyholders and to agents. Policyholders should be provided with a telephone number and
address for complaints and inquiries regarding their coverage.
Some states compile and release annual consumer complaint ratios by insurance company --
some include this information on their web site. These should be considered only one part of the
total picture for an insurer and are not intended for marketing purposes.
Consumer complaints about specific agents or agent practices require special attention from the
insurance company. The insurer should respond promptly to the consumer and conduct fact
finding, audits, and disciplinary action as necessary to correct any agent misconduct.
If agents are to conduct their business in an ethical manner, then the insurers must adhere to
ethical principles and encourage similar conduct from their sales force. Not only do the insurers
have an ethical obligation to their agents but they also have a responsibility to the general public
as well. It is the duty of the insurer to make certain that its sales force obeys the unfair
marketing practices taws, such as misrepresentation, rebating, and twisting. It is equally
important for the insurer to see to it that its claims personnel comply with the laws regarding
It is important for the insurer to lead by example. The insurer must enforce laws which are
pertinent to agent conduct and behavior as well as comply with the laws which apply to the
Most insurance companies have entire divisions devoted to compliance and are well aware of
their obligations towards policyholders. Insurer responsibilities are important for the agent to
understand, so that he or she can provide accurate advice to policyholders on what to expect
from the insurance company. Also, by knowing what to expect from the insurer, the agent can
Policyholders have the right to expect fair treatment from insurers when it comes to policy
cancellations and nonrenewals. State insurance statutes define the amount of advance notice
required before certain types of policies may be cancelled/nonrenewed, and some even restrict
policy cancellations by limiting the reasons upon which the insurance company may base its
decision to terminate a policy.
THE INSURER'S RESPONSIBILITIES TO AGENTS
The insurance company has certain legal, regulatory, professional, and ethical responsibilities to
its appointed agents. The company establishes the agents employment contract, must permit
the agent to act in accordance with the terms of the contract, and must recognize all of the
provisions of that contract. The agency agreement should clearly establish the relationship
between the agent and the company, including:
• Representation and advertising methods
• Fiduciary arrangements
• Status of binding authority
• Procedures for premium payment (emphasizing "no commingling" laws)
• Cancellation procedures if the relationship is terminated
• Processing and recordkeeping arrangements, and
• Any requirement for agent errors and omissions coverage
Since the insurance company operates entirely though the people it employs (especially its
agents), the direction and example must come from the company. Companies should maintain
visible senior management support for compliance from the home office management and
personnel all the way through to agency operations.
In addition, the company must pay the agent the compensation agreed upon in the contract,
reimburse the agent for proper expenditures made on behalf of the principal, and indemnify the
agent for any losses or damages suffered without fault on the part of the agent but occurring on
account of the agency relationship.
Both parties hope to gain from the agency relationship. The most important duty that the
principal owes the agent is compensation, or payment, for the business the agent has sold for
the principal. This compensation is usually in the form of commissions that vary by line of
insurance. The commission rate on renewal business may be the same or lower than on new
business, depending on the company. Agents who receive lower renewal commissions,
however, tend to move the business to a new insurer each year. Life insurance agents
sometimes receive commissions that are higher than the entire first year premuim. The reason
agreement usually spells out the type of business, the amount of premium that must be
generated, the amount of commission that will be paid for each line of business and the length
of time the contract will remain in effect. If the agent fails to meet the terms of the contract, the
principal may terminate the agreement, withhold compensation or reimbursement or, if the
agent has realized personal profits in excess of those stipulated in the agency agreement, sue
to recover the excess profits.
The principal is also obligated to reimburse the agent for any damages or expenses incurred in
defending against claims that the agent may be held liable for in the course of fulfilling his or her
agency obligations. However, if the agent is guilty of breach of duty or lack of due care that
harms the principal, the insurer may sue and recover monetary damages from the agent.
Clear Compliance Directives
An insurance company's primary responsibility to its agents is to provide explicit guidelines for
acceptable and unacceptable market practices. Agents should receive initial and ongoing
compliance training which defines what is and is not permissible when the agent is in the field.
In the past, agents were given great latitude in managing customer relationships without home
office oversight, but regulators have made it clear that those days are over. Regardless of
whether the company considers its agents to be "independent contractors," the government
imposes strict oversight and supervisory responsibilities.
Many insurers have established general guidelines for ethical employee and agent conduct.
Commonly those guidelines address confidentiality, conflicts of interest, and legal and
Written Compliance Plans
Many companies make it easier to comply with legal and ethical trade practices by providing
agents with company manuals spelling out compliance policies. Companies have established
entire compliance departments which control the creation, review, distribution, and use of all
advertising materials. Compliance personnel train agents to educate the consumer, and require
t training often begins before the agent is contracted or hired by the company. This
training is generally referred to as pre-contract training. It is primarily product and sales training
designed to provide the new agent with a sales approach and a general working knowledge of
the company' s products.
This training is continued once the agent is placed under contract with the insurer. There is the
need for continued sales and product training. In addition, the insurer will often encourage
continued professional education through such industry associations as the Life Underwriting
Training Council, and the Chartered Property/Casualty Underwriter and Chartered Life
Underwriter programs available through the American College and American Institutes.
Some companies strongly support technical and continuing education, even going so far as to
reimburse agents who attend continuing education seminars, or who enroll in educational
courses and professional designation programs. Other companies believe that the
responsibility for professional development lies with the agent himself or herself, and only
provide for training during the agent's first few months or years of service.
Most state regulations include agent training requirements as part of the insurance company's
responsibilities. It is also the insurer's responsibility to train and develop quality sales managers,
who influence and guide the sales force on a daily basis through training and sales supports.
Often, agent failure and agent problems are the result of poor management. Proper agent and
management training can produce the desired behavior and ethical conduct expected of the
agents by the company and contribute to agent retention and success. Poor agent retention
has always been a problem for the industry. Agents who are successful will stay in the
business. Adequate training and management programs can enhance the agent's chances for
success and survival in the business.
Among the insurance industry's most prominent challenges are allegations of wrongful conduct
by agents and companies selling insurance, accompanied by million dollar settlements, negative
publicity, plummeting consumer confidence in the industry, and a new regulatory focus on
Headlines accuse agents and companies of:
• Deceptive sales practices
• Misleading policy illustrations
• Vanishing premiums that do not vanish
• Misrepresentation of policy characteristics
• Unnecessary replacement
• Unfair discrimination
• Predatory pricing
• Unfair underwriting practices
Market conduct is the measure of the ways in which insurance companies and their agents
conduct themselves in the marketplace. Market conduct examines how companies and agents
comply with state laws regulating (among other things):
• Sales, and marketing
• Underwriting and issuance of insurance products
• Policyholder service
• Complaint handling
• Claims handling
• Policy termination practices.
Market conduct regulation examines the treatment of insureds, applicants for insurance, and
claimants, by insurance companies and their representatives. Proper market conduct means
conducting insurance business fairly and responsibly. Regulators often see a correlation
between poor treatment of policyholders and financial solvency problems.
Agents and Market Conduct
Agents provide advice and counsel in helping consumers understand one of the most
complicated purchases they will ever make. As insurance products become more complex,
there is more opportunity for consumers to be confused. Studies show that four out of five
Americans feel their insurance policies are too difficult to understand, and most consumers do
not understand what their policies cover.
Agents are expected to service a client’s changing needs, but traditionally make a commission
only when a sale is made. While the agent ideally should be committed to serving the
customer, he or she needs to make sales in order to make a living.
Agent activities aren't easily monitored. Much of the nation's insurance sales force works as
independent agents, representing several insurance companies at a time, so insurance
companies obviously have the most difficulty controlling what the agent says to the consumer.
FRAUDULENT AND OTHER ILLEGAL ACTIVITIES
Some activities are not only unethical, but are also violations of the law. Any activity that is
illegal is also unethical and must be avoided by the professional insurance agent.
Illegal activities reflect badly not only on the individuals who engaged in them, but also on the
people who worked closely with that individual and either knew or should have known what was
going on. If people know that illegal activities are taking place, or if they are in a position of
responsibility and should be alert to illegal activities on the part of those who report to them,
they may be considered just as guilty under the law as the persons who committed the illegal
Illegal activities also reflect badly on the entire company and on the industry as a whole. To a
large extent, trust is an absolute concept. If people don't trust a company or the insurance
industry in general, it makes the marketing of insurance that much more difficult for everyone in
The image of the insurance industry is everybody's business. Overlooking illegal activity on the
part of others is unethical, since it doesn't serve the best interests of the public, and because it
makes things harder for anyone involved in life insurance marketing.
Ignorance of the law is no excuse, so agents should be sure they are aware of the laws that
apply to the area where they do business.
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.
Agents must be particularly alert to consumer fraud at claims time,
• Fraudulent claims
• Exaggerated claims, or
should be reported to the carrier immediately.
Fraudulent claims are investigated at both the state and company level. Many state insurance
departments have established fraud investigation units and impose heavy fines and penalties
for those caught submitting fraudulent claims. The larger insurance companies have special
investigative units (SlUs) to conduct claims reviews and to help detect and prevent fraudulent
AGENTS AND UNDERWRITING
Post Claims Underwriting
Life and health policies are issued based upon the applicants responses to questions on the
application designed to determine the applicant’s health status. The time to conduct
comprehensive underwriting and clear up any questions is before a claim arises, not after.
Postclaims underwriting is the illegal practice rescinding, canceling or limiting of a policy or
certificate due to the insurer's failure to complete medical underwriting and resolve all
reasonable questions arising from written information submitted on or with an application before
issuing the policy or certificate. No insurer issuing or providing any policy of disability insurance
covering hospital, medical or surgical expenses shall engage in the practice of postclaims
Failure to Obtain Full and Complete Client Data
In accordance with agency law, information given to the agent is the same as providing the
information to the insurer. It is also important for the agent to know the underwriting guidelines
of each insurer they represent before soliciting business.
If the agent knows of anything adverse concerning the risk to be insured, it is his or her
responsibility to provide this information to the insurer. To withhold important underwriting
information could harm the insurer's risk selection process.
A failure on the insurance sales person’s part to obtain full and complete information concerning
the prospective client is unethical because it can lead to recommending or selling products that
are unsuitable for the prospective client. In virtually all cases of this type of unethical action, it is
a matter of the sales person’s failure to put the client’s needs first.
State law usually requires the agent and the applicant to certify in writing that the applicant has
read, or had read to him, the completed application and that that any false statement or
misrepresentation may result in loss of coverage.
Some agents have the authority to issue policies for the risks they have underwritten. Copies of
the application, binder of insurance and the policy are sent to the insurer. Even though a policy
has been issued, the insurance company underwriter may send a notice of cancellation if he or
she finds that the risk does not meet company guidelines.
The formation of a life or health insurance contract is somewhat different than property-casualty
in that the life or health agent usually does not have the authority to put a policy into effect (bind
coverage). The agent can only solicit offers from prospective insureds. The insurance company
approves and issues the contract after receiving the application and premium from the agent.
The restricted underwriting authority of the life insurance agent is related to the nature of life
insurance contracts. The insurance company is in a much better position than the agent to
evaluate the applicant's insurability. Life insurance policies are generally non-cancellable, longterm
contracts. A life insurance policy is contestable only for a one or two-year period. Property
and casualty insurance, by comparison, involves a short-term contract.
Failure to complete an application accurately and honestly could subject the agent to
disciplinary action both by the company and the insurance department. In addition, life and
health insurance underwriting decisions frequently rest on medical questions. The life or health
insurer employs medical experts and has at its disposal various investigative reports that shed
light on the desirability of a risk.
Agents can build a higher quality book of business and establish sound relationships with
insurers by engaging in responsible field underwriting. This involves analyzing risks and
exposures, taking steps to avoid or reduce risks, considering loss control efforts and submitting
risks to the proper markets. However, the agent cannot perform all the needed underwriting
Company underwriters are increasingly relying on paramedical exams and blood tests for
information in order to accurately evaluate life and health risks. Blood testing is almost
the responsibility of the agent to be sure to ask the applicant medical and nonmedical
questions clearly and precisely and to record the answers the same way. The agent must be
careful to present the facts and not his or her interpretation of the facts. If the agent has any
suspicions whatsoever, he or she should probe when taking the application, or, if the matter is
not one he or she can probe, any suspicions should be stated to the underwriting department in
the space provided on most applications for agent's comments. The goals of the agent are to
get complete and accurate information from the applicant and to detect the possibility of moral
Every agent or broker needs to engage in the process of screening out unacceptable risks.
There is no point in submitting risks that obviously will be rejected by the insurer, because that
wastes their time and that of their client. And, if the agent submits poor risks consistently that
are accepted, his or her book of business with the insurers will suffer and the agent might
jeopardize his or her relationship with them.
In many insurance sales, the agent is the primary collector of underwriting information. A
primary objective of the agent as a field underwriter is to help protect the insurance company
from adverse selection. When confronted with an impaired risk, it is up to the agent to ask the
right questions and submit the proper information to the underwriting department so the
appropriate policy can be issued.
By fully explaining the applicant's medical conditions (course of treatment, present status) or
hazardous activities (mountain climbing, aviation, etc.) the agent may be able to avoid
underwriting declinations. The agent is also responsible for delivering the policy as issued and
explaining its limitations and/or extra premium to the applicant.
In addition, knowledge possessed by the agent is considered to be in possession of the
principal. From a legal standpoint, a life insurance company is considered to know everything
its agent knows about a prospect, whether that information was provided by the prospect or
simply observed by the agent.
A conflict of interest can arise in the agent's role as field underwriter. Agents have a duty to
make known to their companies any information that would impact the underwriting decision. If
agents withhold or distort such information, the company will end up insuring risks that it
otherwise would not have accepted, or would have accepted only at higher rates. As a result,
claims experience will be worse than anticipated, and that will hurt the company's financial
performance. That, in turn, may affect the performance of the policies owned by an agent's
clients, and it may also affect an agent's competitiveness in the marketplace, if the company
finds it necessary to raise its rates generally.
The agent's duty as a field underwriter can conflict with the agent's self-interest regarding the
earning of commissions. If the company obtains information which causes it to reject the risk,
the agent won't make a sale. Or, some agents find rated places hard to place, so even if the
risk is simply "rated up" by the company rather than rejected, the agent may be afraid that the
The Agent's Statement is part of the application and requires that the agent provide certain
information regarding the proposed insured. Generally, this includes information regarding the
agent’s relationship to the insured, data about the proposed insured's financial status, habits,
general character and any other information which may be pertinent to the risk being assumed
by the insurer.
Agents may fail to include in their confidential report an item of significance because the
information isn't specifically asked for. Agents have a responsibility to provide complete and
accurate information about an applicant, and that responsibility extends beyond the items listed
on the application form.
Sometimes agents are tempted to withhold or distort underwriting information not so much out
of their own self-interest, but out of the obligation they feel to serve the applicant's best
interests. Agent’s obligation to prospects involves making proper coverage recommendations
and providing service not concealing or falsifying underwriting data. Misrepresentations on
applications can cause coverage to be voided which does not serve the client's best interests.
Typically, the application asks for the following information:
• Applicant's name and address
• Type of insurance requested
• Property/hazard to be insured
• Location and description of property to be insured
• Prior loss experience
• Any known hazards
• Background information on the applicant Limits of insurance requested
Applications for life and health insurance generally require detailed information regarding the
insured's past medical history, current physical condition and personal morals. Many times, the
proposed insured must undergo a medical examination.
The majority of agents do not use deception when selling an insurance policy to a client (it's not
only unethical, but illegal to do so). However, often polices are sold because the client
incorrectly assumes something about the policy. Most consumers do not have the knowledge
and understanding of the policies to the extent an agent does.
Therefore, it is crucial to present policies in a clear manner, with no misconceptions. When
agents take the time to fully explain all parts of the policy, everyone benefits. Trying to explain a
misconception once a policy has been issued is not only difficult to do, but is damaging to the
agent's reputation since the client often thinks that the agent was trying to mislead them.
Another source of confusion and misconception can occur when policy premiums are
discussed. Premiums can be falsely stated to the client in order to get a sale. At times agents
Misquoting a premium may result from a mistake, a lack of education, or even inexperience,
whereas a deliberate misquote is done on purpose to defraud the client.
The Importance of the Application to the Applicant
In addition, the agent is responsible for providing the insurance applicant with privacy notices
and information such as the Notice of Insurance Information Practices, and finally to provide the
insurance applicant with necessary receipts for the initial premium collected.
Precision and accuracy in completing the application are in the best interests of both the insurer
and the prospective insured. The agent also has an ethical responsibility to educate his or her
prospective client so that he or she fully understands the nature of the application process: why
the information is required, how it will be evaluated, the need for accuracy and honesty in
answering all questions and the meaning of insurance terms included in the contract.
All of the information submitted on an insurance application has a direct bearing on whether the
policy will be issued as requested, whether the application will be rejected or whether another
policy will be offered by the insurer. An agent who knowingly or unknowingly fails to provide all
the pertinent information about a prospect is not serving anyone's best interest.
A signed and witnessed copy of the application often becomes part of the legal contract of
insurance between the insured and the insurer, so it is of utmost importance that the application
information be accurate and complete, and that the proper signatures are secured. Material
omissions or errors might subject the applicant to denial of benefits, voiding of the policy, and
even prosecution for fraud.
BINDERS AND CONDITIONAL RECEIPTS
Two facets of insurance policies that need particular explanation in order that the client fully
understands them are the Binder and the Conditional Receipt.
An agent who has been given binding authority may immediately bind the insurer on the risk. A
binder has the full force and effect of the policy.
A binder is an acknowledgment that the coverage offered under the policy is in effect during the time it takes
for the company to issue the policy. A binder can be oral or written, but a written binder is
preferable to avoid misunderstandings later. Only agents who have been given binding
authority by the insurers they represent may issue binders. Usually life agents and Property
Casualty brokers and solicitors are prohibited from binding coverage by law.
A binder document should have the following info:
• Name of the insurer
• Perils insured under the policy
• Policy amount
• Time period the binder covers (usually 10-90 days)
• Any conditions affecting the coverage
The client, the agent, and the insurer should all receive a copy of the binder. Binders are used in the property
and casualty field.
A few life insurance companies authorize certain agents to issue an "unconditional” or binding
receipt that makes the company liable for the risk from the date of application. Like the propertycasualty
binder referenced above, his coverage lasts for a specified time or until the insurer
either issues a policy or declines the application, if earlier. The specified time limit is usually 30
to 60 days.
With a binding receipt, regardless of the applicant's insurability, he or she is covered for a
specific period of time following completion of the application and the payment of the initial
premium. This type of receipt for life and health policies is rare.
A Conditional Receipt, used in life and health insurance, provides coverage once the initial
premium is paid, and before the policy is issued, however, coverage is provided during this
period only if the applicant meets underwriting requirements for the particular coverage.
Coverage depends upon the insurability of the client.
Agents may give the applicant a conditional receipt if the premium is paid at the time of the
application. This receipt makes the coverage effective on the date of the application, if the
applicant is found to be insurable under the company's general underwriting rules in effect at the
time of application. However, some conditional receipts make coverage effective on the date of
application, or the date of the medical examination, whichever is later.
If the applicant were to die before the policy was issued, the beneficiary would receive the face
amount of the policy.
On the other hand, if the applicant was found to be a substandard risk, then the conditional
receipt is null and void and no coverage would be effective. If the policy is not issued as applied
for, then no coverage would be in force until the applicant accepts the substandard policy and
pays the additional premium required by the rating.
Altering applications for any purpose is illegal and is not to be engaged in, encouraged, or
tolerated under any circumstances.
Applications have been altered for a number of fraudulent reasons. Sometimes the purpose
sale. Another fraudulent instance of altering applications has involved adding zeroes to the
amount of coverage applied for.
Signing Someone Else's Name (Windowing)
Obtaining client signatures on all of the necessary applications and forms is an important part of
an agent’s job. Every so often an agent simply forgets to obtain a signature from the client.
Though this is often simply an oversight on the agent's part, when it occurs regularly it might
show that an agent needs to work on their organization skills.
In some cases, signatures might be purposely overlooked as a way of avoiding negative
aspects of certain disclosures. This commonly occurs when replacement forms are required.
This is not only unethical, but illegal as well since all forms need to be disclosed to the client.
"Forgetting" to obtain a client’s signature may lead to the agent forging the client’s signature.
Forging a client’s signature is much more common in business than most people realize.
Forging a signature is not only unethical, but also illegal.
"Windowing" is a term used to describe forging someone else's signature, derived from the
illegal practice of holding an authentic signature up to a window and tracing over it on another
Windowing is not only illegal, but self-defeating, for there is no way it can go undetected forever.
Perpetrators may be subject to both criminal and civil penalties as well as loss of their career
and reputation. Any form of windowing is blatantly illegal and is not to be engaged in,
encouraged, or tolerated under any circumstances.
Applications and Fraud
Fraud can be committed:
• By the applicant without the agent’s knowledge,
• By the agent without the applicants knowledge, or
• By both working in conjunction.
Agents have advised applicants to omit information to ensure the applicant will be issued
coverage, or will be issued coverage at a lower premium. Sometimes agents illegally sign
applications on behalf of the applicant, in the belief they are helping the client expedite the
request for coverage.
If an agent ‘enhances’ an insurance application in order to help the applicant get a lower
w that even individuals who generally consider themselves to be "honest' think there
is nothing wrong with inflating insurance claims in order to collect more than they would
otherwise be entitled to after a loss has occured.
One of the most difficult decisions an agent may have to make is when he or she suspects a
valued client of submitting a fraudulent or exaggerated claim. Conversely, the agent must be
careful not to charge someone with fraud when there is no evidence of fraudulent activities.
Submitting the Application & Initial Premium
Life and health insurance agents are generally encouraged to collect the initial premium with the
application. Evidence shows that this procedure is most effective in having the insured accept
the policy when it is issued. If the insured does not pay the initial premium at the time of
application, chances increase that he or she will not accept the issued policy-
An important point that the agent should make to the applicant is that if the applicant waits to
pay the premium, he or she may become uninsurable, or may die before the policy takes effect.
When the initial premium is not paid with the application, no contract is in force. The applicant is
not making an offer to the insurer. He or she is merely inviting the insurer to make an offer by
issuing the policy.
Since there is no insurance in force under these circumstances, when the agent delivers the
policy and collects the initial premium, there may be additional underwriting requirements which
must be satisfied. Most commonly, the insurance company may require that the insured sign a
health statement verifying that no change in health has occurred since the date of the
Prompt Submittal of Application
Agents should also explain to clients that once the underwriting department of the insurer receives the
applications, further information may be needed. Anything which delays the issuance of the policy is
detrimental to both applicant and agent. It is important that the agent obtain all possible relevant
information from the client before sending in the application. Taking time to ask questions to reveal
particular risks affecting the policy will save time later.
Once the agent is satisfied that the information on the application is both thorough and accurate,
he or she has an ethical responsibility to the client to submit the application to the insurer as soon as possible. The
agent has the further responsibility to deliver the policy as soon as it is issued, and to sit down with the client
and go over its contents.
Agents should deliver applications to the insurer/principal as soon as possible. Such efficiency
protects the applicant, ensuring coverage within a reasonable time period, and also protects the insurer in
cases where a binder provides coverage under a policy which is later rejected.
It is important for the agent to submit the application, initial premium, and any questionnaires or
other forms to the home office underwriter promptly. The agent should review all forms for
completeness and be sure that they are properly signed. Not only does this make for good
relationships with the home office underwriter, but it is extremely important to the applicant.
mely important that an accurate record of such transactions be kept. It is also wise for
the agent to keep copies of applications and other information. This avoids unnecessary delay
or other problems if the originals are lost.
Explaining the Underwriting Process
By definition, underwriting is the process of selection, classification and rating of risks. During
the risk selection process information is evaluated to determine whether the risk is acceptable,
and how the individual or risk will be classified (preferred, standard or substandard). Once this
part of the underwriting procedure is complete, the policy will be rated in terms of the premium
which the applicant will pay. The policy will then be issued and subsequently delivered by the
Another ethical responsibility to the applicant is to briefly explain the underwriting process that
the application will undergo. Insurers are in business to make a reasonable profit and
underwriting is important because the class of risk the underwriter selects affects the ratio of
claims paid to premiums collected. The major function of the underwriter is to select risks that
will fall into a "normal range" of expected losses. If the losses selected fall above the normal
range, the rates charged will be inadequate to cover claims. If the losses fall below the normal
range, the Insurance Department may request that the insurance company revise its rates to
avoid excessive premiums.
Keeping the Applicant Informed
The underwriting process for an insurance application can be time-consuming. Delays can
occur whenever an underwriter needs additional information from the applicant and relays that
request through the agent, or whenever a counteroffer, a different policy or a different rate is
proposed to the applicant, again through the agent.
It is an agent's duty to help ensure that there are no unnecessary delays in the underwriting
process. This means checking the application for accuracy and giving careful thought to the
information provided and the coverages offered before the application is submitted. Many
underwriting delays occur simply because the application is not complete or is not clear.
Applications, binders, pictures, building diagrams and other pertinent underwriting information
should be submitted to the insurer as soon as possible. The time frame will vary, of course,
depending on the type of insurance and the complexity of the risk. An agent must take these
factors into account in order to move in an efficient manner. If it appears that the underwriting
process may take longer than anticipated, the agent should inform the applicant about the
Ratings and Rejections
What if a policy is not issued as applied for? What if it is rejected or the premium is increased?
The agent should be certain that he or she understands the basis for the rating or rejection,
and, having understood it, determine if there is any information which could supplement or correct the
ts have an ethical responsibility to let clients know that the policy has been surcharged, so
the client may look for coverage elsewhere.
Most policies are issued as applied for. On the other hand, some policies will be surcharged or
rejected because the risk does not meet the insurance company's underwriting guidelines.
When this happens, the agent has two responsibilities:
• He or she should personally review the surcharge or rejection to determine if the rating
or rejection was proper and to get as much information as possible to be able to explain
the higher premium or rejection to the applicant.
Assuming the rating or rejection was valid, the agent has the responsibility to notify the applicant
promptly. To withhold this information in an effort to prevent the applicant from seeking
insurance elsewhere is a breach of ethics and could actually harm the applicant and his or her
Delivering the Policy
The agent is responsible for delivering the insurance policy to the insured and (many times) also
collects any premium which may be due at the time of policy delivery. Because some
coverages do not take effect until the policy is delivered, timely delivery is critical. It is
considered a good business practice to arrange for personal delivery of the policy. The agent
should take the time to explain all policy provisions, particularly the exclusions, and any riders
that may restrict the coverage given in the policy, review the purpose of the policy and how it fits
into the policyowner's total insurance plan, reinforce the relationship and good will established
with the client, explain the possible need for additional coverage, explain how the agency
provides ongoing service (such as annual reviews), and even ask the insured for referrals.
With life and health insurance policies, if a conditional receipt has not been previously issued,
the insurer may require the agent to obtain a statement of good health at the time of policy
Legally, the policy is considered "delivered" when it is mailed or turned over to the policyowner
or someone acting on his or her behalf. Some companies mail policies directly to policyowners.
However, many prefer to have the agent make a personal delivery.
Once the policy is delivered, the agent should wrap up any concluding paperwork and complete
the policyholder's files.
Agents should pay particular attention to any riders, endorsements and optional coverages. If
the policy has been issued with any changes or amendments, the agent must explain these
changes and obtain the insured's signature acknowledging receipt of these.
After the policy is issued and prior to policy delivery, the agent should check to be certain that
the coverages, limits, forms, endorsements and so on are contained in the policy as requested.
Although most policies are forwarded to the insured in the mail, the most successful agents will
often deliver policies in person. By delivering the policy in person, the agent will have the
policy and showing how it meets the policyholder's specific needs, reinforces the sale and helps
to avoid misunderstandings. It also serves to build trust and confidence on the part of the client
in the agent's abilities and desire to be of genuine service.
Explain the “Free Look”
Another practice that is considered unethical is the lack of full disclosure of specific policyowner
rights such as the “free look” provision. Most states require the insurer to provide for a "free
look” period (usually 10 days) during which a life health or disability insurance policy holder may
review the policy and make a final decision regarding the policy and receive a full refund if they
decide not to keep it. The free look period begins on the date of policy delivery, so it is
important to fully explain the details of the free-look provision, and to acknowledge any request
for a refund promptly.
Abuse of the free-look rules is unethical. The insurance professional’s failure to tell the policy
owner his or her rights under the free look provision, or to explain the details of the provision, is
When an agent becomes licensed, he or she must intend to actively engage in the insurance
business with members of the public, and not use the license principally for transacting a
disproportionate amount of controlled business. Controlled business means insurance on the
agent's, broker's, or solicitor's own property or interests, or those of his family, his employer, or
any partnership, association, or corporation in which he or a family member has an interest as
an officer, director, stockholder, partner or employee.
A certain amount of controlled business is permitted (and this amount differs from state to
state). But a licensee may not be permitted to earn commission or compensation from
controlled business in excess of a stated amount (10% to 50% of total compensation,
depending upon the state) during a stated time period (usually a calendar year). If a greater
proportion does come from controlled business, the practice is unethical and in violation of law
and the producer's license may be revoked or suspended.
Another area of agent responsibility that has surfaced in recent years is a clause in either the
agency contract or the insurer's compliance manual asking the agent to report suspected or
confirmed misconduct on the part of other agents or company employees. This has come about
because many times agents are aware that their colleagues are violating fair practices laws
before the insurance company uncovers the behavior. Company compliance officers now hold
everyone in the company responsible for monitoring compliance.
Premium & Rates
The premium is the total cost for the insurance coverage (or limit of liability) purchased, and is
calculated from the rate-the amount of dollars or cents per particular unit (amount) of insurance
to be purchased. Base rates have been developed for various risks and these rates are
multiplied by an exposure base (i.e., amount of insurance, payroll, sales, area).
Some risks are class rated, which means that the loss history of a class of risks having similar
characteristics (i.e., male drivers age 25, jointed masonry buildings in a particular urban area,
male non-smokers age 30, etc.) was used to develop the rate. Underwriters usually have the
option of applying rating modifications, based on the loss history or special characteristics of a
risk. For example, the insured's actual past loss experience plays a major role in the
development of the rate. In certain lines of insurance an underwriter may use judgment rates,
based largely on the underwriter's knowledge and experience.
CONFIDENTIALITY & PRIVACY ISSUES
In the course of qualifying a risk, completing an application, analyzing needs or determining
appropriate coverages, insurance agents are privy to a client's personal financial and medical
information. Ethics require that the agent respect the sensitive nature of this information and
keep it confidential. Personal information about a client should never be released without
proper approval from the client.
To obtain such information, agents must earn their clients' trust. To violate that trust would be a
breach of ethics. It would also be bad for the agent's career, for if a client discovered that the
agent had failed to keep sensitive information confidential, the agent would likely lose not only
that client, but also other clients who heard about the incident.
Most agents wouldn't deliberately violate a client's trust through the improper use of confidential
information. Where the danger largely lies is that the agent might carelessly divulge something
that didn't seem important, but about which the client was very sensitive. Other than to provide
underwriting information to their company, agents should make it a rule never to discuss
business or personal matters of a client with anyone but the client. Even divulging that a person
or entity is a client of the agent is unethical, and possibly illegal, without prior permission.
Sales professionals owe a duty of confidentiality to prospects, clients, their employer and
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.
Sales professionals are under an ethical and legal duty to keep all their clients information
confidential. They may not ethically disclose any personally identifiable information that relates
to a prospect or client, unless such disclosure:
• Is reasonably required to transact the business authorized by the prospect or client
• Must be made in order to comply with legal requirements
• Is required in order for the professional to maintain a defense against charges of
malpractice or other wrongdoing
In addition to gaining client information, sales professionals may also be privy to proprietary
information gained in the course of their employment. They are under an ethical obligation to
keep such information concerning their employer and/or business associates confidential.
Confidential information obtained in the course of employment should not be used for an
employee's personal gain or benefit. It is a violation of federal law for an employee or agent to
trade in company securities on the basis of inside information which is acquired during the
course of employment. There are also new federal and state laws requiring agents and insurers
to protect the insured from identity theft as well as protecting their personal information from
disclosures without their authorization.
That means restricting access to client records to those employees with a legitimate business
reason, and documenting office procedures for confidentiality and privacy protection. It is
critical that financial and other information on clients is not divulged to anyone in the absense of
due legal process or the written consent of the client.
INSURANCE INFORMATION AND PRIVACY PROTECTION ACT
The NAIC Privacy Act
The NAIC Model Privacy Act provides for the enforcement of individual rights. The individual
has the right to information concerning himself or herself, and the right to correct inaccurate
information, the right to know the reasons for being turned down for insurance, or any other
adverse underwriting decision. These rights are those found under the Fair Credit Disclosure
Authorization forms are required by law to be prescribed and approved by the state insurance
commissioner. The disclosure form must be written in accordance or with the plain language
laws of the state, and dated.
The notice must give the applicant or insured the following kinds of information:
• The people with access to personal information
• The kind of information to be collected
• The kind of information the insurer can receive without the applicant's prior approval
• The sources of information
• The persons to whom information may be disclosed without the applicant's prior
The form must also state the reason information is collected, and how it will be used.
A fine of $10,000, up to one year in jail is the penalty for any person who obtains information
that he or she has no legitimate reason to receive.
The applicants signature on the disclosure form authorizes the insurer to collect and
disseminate information in the manner described in the notice. The authorization is only good
for a certain period of time. For example, if authorization is given to an insurer to collect
information with regard to a claim settlement, the authorization is good for 30 months. At the
end of this period another authorization must be obtained. The applicant or insured should be
provided with a copy of the authorization form.
Personal information may be disclosed to persons under certain conditions. Among those to
the Medical Information Bureau) and state insurance departments. This type of thirdparty
disclosure may require authorization, but in some instances authorization is not required,
as long as the applicant or insured has received proper notification of the insurer's information
practices. In some cases information is also passed on to those conducting scientific research,
audits, or marketing approaches.
Insurance agents are exposed to and trusted with personal medical and financial information
from the clients they work with. It has always been good business practice to view this type of
information as confidential.
In 1996, however, the federal government passed the Health Insurance Portability and
Accountability Act (HIPAA) that provides specific rules for how agents must protect personal
medical information. It is no longer an option.
Who is required to comply?
Three types of organizations are required to comply with the rules outlined in HIPAA.
• Covered Entities – A Covered Entity includes health plans, healthcare clearinghouses,
and most health care providers. The law considers employer group health plans as
• Business Associates – A Business Associate includes in business or individual who
works with a Covered Entity and creates, uses, receives, or discloses protected health
• Employer and Other Sponsors of Group Health Plans – An Employer and Other
Sponsors of Group Health Plans includes all employers that receive protected health
information as well as other organizations that sponsor group health plans (for example,
Protected Health Information
HIPAA defines Protected Health Information as any individually identifiable health information
that is created or received by a healthcare provider, health plan, employer, or healthcare
clearinghouse. The definition of Protected Health Information includes a person’s name and
HIPAA requires that a group health plan does not disclose this information except for the
following permitted or required disclosures:
• To the individual;
• To carryout treatment, payment, or healthcare operations;
• With a valid authorization;
• Under limited circumstances, when the individual has the opportunity to agree or object
• Group health plans may make disclosures of protected health information to business
associates if the plan obtains satisfactory assurance that the business associate will
adequately safeguard the information.
To an individual seeking to access their protected information;
To an individual seeking an accounting of disclosures of their protected health
When required by the Secretary of HHS to investigate or determine the group health
plan’s compliance with the regulation.
Insurance agents fall under the definition of a “Business Associate;” and are required to enter
into a “Business Associate Contract” with the health plans with which they work. These
contracts are required to have the following provisions:
Establish the permitted uses and disclosures of protected health information;
Provide that the business associate will not use nor further disclose the information other
than as allowed under the contract or required by law;
Provide that the business associate will use appropriate safeguards to prevent the
unauthorized disclosure of information;
Require the business associate to report to the health plan any unauthorized uses or
disclosures of the information;
Ensure that any agents or subcontractors to whom the business associate discloses
protected health information agrees to these same restrictions;
Provide that the business associate will make protected health information available for
Provide that the business associate will make protected health information available to
amend and that the business associate has the capacity to make amendments;
Provide that business associates can provide for an accounting all of their disclosures of
protected health information;
Require that the business associate agrees to make its internal practices, books, and
records available to the Secretary of HHS for inspection, if necessary;
Provide that the business associate agrees to return or destroy, if feasible, all
information and limit future uses and disclosures to those purposes that make its return
or destruction infeasible, and
Authorize the termination of the contract if the business associate has violated a material
term of the contract.
The Gramm-Leach-Biley Act (GLBA)
Insurance agents also need to be familiar with requirements of the Gramm-Leach-Bliley Act
(GLBA) of 1999. This law put into place privacy requirements for the protection of consumer’s
non-public, personal financial information. GLBA is specifically designed for and directed at the
professionals working within the financial services industry. The first step in determining the
impact of GLBA on business is to determine if agents receive information that is protected by
relates to a personal, family, or household product or service; information that is non-public, and
information that identifies the individual.
If they receive this type of information, the second step is to determine if they disclose the
information in any way. As an agent doing business in the insurance industry, it is nearly
impossible to not disclose this protected information as defined by GLBA. The final step in this
process is to determine the appropriate discloser and authorization documents they should use
within the course of their daily business.
Each individual state’s government has the job of enforcing the GLBA requirements within the
insurance industry. While efforts have been made to promote consistency from state to state,
the reality is that each state’s compliance measures can and may be different. Life and health
agents need to be familiar with the compliance measures for each state in which they do
The information presented in this section is not intended to be a complete description of HIPPA
or GLBA. In the context of ethics, this information is intended to provide an overview of this
important legislation. As insurance professionals, it is responsibility to conduct our business in
accordance with state and federal laws. If, after reviewing this section, you want additional
information regarding these laws, please see our course “Privacy – It’s the Law”.
Fair Credit Reporting Act
An insurance company may hire a consumer reporting agency to obtain personal information
about an applicant for underwriting purposes before a policy is issued. The Fair Credit
Reporting Act is a federal law that helps to ensure confidential, fair and accurate reporting of
information about consumers-including applicants for insurance. The Act stipulates that
consumer reports may be furnished by consumer reporting agencies only for certain purposes,
which include the underwriting of insurance. Applicants for insurance must be advised that such
reports may be obtained and, within certain guidelines, consumers may demand to know what
information an investigative agency has on file about them and to whom such reports have been
made. Consumers also have the right to insist that disputed information be reinvestigated and
corrections be made and sent to anyone who received a consumer report about them.
The Inspectlon Report
Insurance companies usually require an inspection or an appraisal of the property to be insured.
An appraisal is an estimate or opinion of value. Value in real estate terminology, is the present
worth of future benefits arising from the ownership of real property. Most insurers use
professional appraisers to determine the value of the property by calculating the replacement
cost of the property based on the construction cost at current prices of similar structures.
Insurers require insureds to maintain insurance equal to a specified percentage of the
replacement cost of the insured property. The agent should explain that the coinsurance clause
is required in fairness to other policyowners who would otherwise be paying more than their
share of premiums and in order for the insurer to have adequate premiums to pay for losses.
The CredIt Report
Most commercial insurers order a credit report to determine the applicant's ability to pay
premiums and to determine whether he or she may be prone to submitting fraudulent claims.
Again, the purpose of this report should be explained when the agent asks the applicant to sign
the application for insurance.
When an application is submitted to an insurance company, a consumer reporting agency may
be used to obtain personal information about the applicant to be used in the underwriting
evaluation. To protect the consumer's right to privacy in this situation, the federal Fair Credit
Reporting Act includes procedures for consumer reporting agencies to follow in their dealings
with businesses to ensure that records are confidential, accurate, relevant and properly used.
Consumer reports include written, oral and other forms of communication which a consumer
reporting agency has regarding a consumer's credit, character, reputation, or habits, which is
used or collected to determine whether or not a consumer is eligible for credit, insurance,
employment or other purposes authorized under the Act. Consumer reports may only be issued
to persons who have a legitimate business need for the information. Governmental agencies
may also be provided with a consumer's name, present and former addresses, and present and
past places of employment.
Investigative Consumer Reports
An investigative consumer report includes information on a consumer's character, general
reputation, personal habits, and mode of living that is obtained through investigation, i.e.,
interviews with associates and friends and neighbors of the consumer.
Such reports may not be made unless the consumer is clearly and accurately notified in
advance about the report in writing within three days of the date on which the report was first
requested. The consumer must also be notified that he or she is allowed to request additional
Consumer Reporting Agencies
Consumer reporting agencies collect information on individuals, prepare reports, and make the
reports available to persons or organizations having a legitimate reason to receive such
information. These agencies may operate for profit; for example, a credit union. Or, agencies
may be nonprofit, such as the Medical Information Bureau (MIB) which is a clearinghouse for
confidential medical information on applicants for life insurance.
When the noncompliance is due to negligence, the guiltyparty must pay the consumer the sum
of the consumer's actual damages, the costs of any successful action to enforce liability, plus
reasonable attorney's fees.
The commissioner of insurance has the authority to investigate any insurer, or any agency used
by the insurer to collect information, to determine if the company is in compliance with insurance
laws. If the commissioner believes that a violation of the Act has taken place he or she can
conduct a hearing to determine the facts.
If a violation is found, the commissioner can issue a cease and desist order, but if the violator
continues in violation, the commissioner can institute a fine of up to $10,000 for each violation.
If the violation is one that happens with such frequency that it appears to be a general business
practice, the fine for each violation can be up to $50,000.
If a policy is being renewed, the insured must be given notice by the renewal date If a policy is
being reinstated, the applicant-insured must be given notice at the time the request is made If
an insured is requesting a change in benefits, the insured must receive notice at the time the
request is made.
Failure to comply with the provisions of the Fair Credit Reporting Act makes the guilty party
liable to the consumer for the sum of actual damages sustained as a result of the
noncompliance; punitive damages deemed proper by a court; and the costs of an action which
enforces liabflity, plus reasonable attorney's fees.
Consumer reporting agencies are specifically prevented from putting information in their reports
about bankruptcies over 14 years old; suits and judgments over seven years old or in which the
statute of limitations has expired, whichever period is longer; paid tax liens or accounts placed
for collection or charged to profit which are over seven years old; arrests, indictments, or
conviction of crime reports; and any other adverse information which took place seven years
prior to the report. (These restrictions don't apply when the consumer credit report is used in
connection with a credit transaction of $50,000 or more, a life insurance policy of $50,000 or
more, or when it concerns employment of an individual earning $20,000 or more.)
Privacy Act of 1974
The insurance industry is one of the largest collectors and users of personal information. Two
federal laws governing the disclosure and use of such personal information are the Fair Credit
Reporting Act and the Privacy Act of 1974. The NAIC Model Privacy Act has also had an
important impact by helping individual states to enact regulations governing privacy. These
Acts protect individuals from misuse of personal information that has been collected about them,
prohibit the use of deceptive practices in gathering such information, provide for advance notice
to the individual when such information is to be collected, and provide guidelines for correcting
inaccurate or otherwise disputed personal information.
It became clear in the 1970s that with the vast numbers of organizations collecting and using
personal information, controls were necessary to protect the public from inaccurate, or misused
information. The Privacy Act of 1974 was designed to:
1. Minimize intrusiveness
2. Require fair and impartial collection, analysis, and presentation of information and
Applicants for insurance must be given advance notice of the insurer's practices regarding
collection and use of personal information. Notice must be given promptly and in writing.
Notice should be given in the following cases and in the following manner:
• If a third party is interviewed, the applicant must be given notice when the collection of
information has begun
• If only the applicant is interviewed, the applicant must be given notice when the policy is
Consumers who feel that information in their report is inaccurate or incomplete may inform the
consumer reporting agency, which then must reinvestigate and record its findings in a
reasonable period of time. If the information is no longer accurate or verifiable, it must be
deleted. If the dispute is not resolved after reinvestigation, the consumer may insert a brief
statement (not more than 100 words) concerning the problem, which then must be noted in any
future consumer reports the agency provides on that consumer.
If insurance is denied, or charges are increased, based on information contained in a consumer
report, the insurer must notify the consumer and report the name and address of the consumer
reporting agency which made the report. If insurance is denied, or charges are increased, due
to information obtained from a person or organization other than a consumer reporting agency,
the insurer must disclose the nature of that information to the consumer upon request. The
insurer is responsible for informing consumers of their right to request this information when the
adverse action is communicated (at the time the person is either declined for insurance or is
The maximum penalty for obtaining consumer information reports under false pretenses is
$5,000, or imprisonment for one year, or both. The same penalty is imposed on officers or
employees of consumer reporting agencies who have knowingly and willfully provided consumer
information to a person not authorized to receive it.
Virtually every jurisdiction prohibits the act of twisting and harshly penalizes any offender. 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:
• imprisonment, and/or
• license suspension/revocation.
Twisting and churning are forms of replacement that employ the use of misrepresentations to
influence the policyowner's decision. The term "twisting" is used to describe the practice of
using misrepresentations to induce replacement of a policy issued by an insurer other than the
one the replacing agent represents. The term "churning" is used to describe the practice ofpresentations to induce replacement of a policy issued by the insurer the agent
represents. Whether twisting or churning, the agent's goal in such cases is to earn a new firstyear
commission for himself or herself and not to serve the client's best interests.
Any action taken to further the agent's self-interest rather than the client's best interests is,
unethical. Any form of misrepresentation is, of course, illegal and unethical. Twisting and
churning are in most states specifically prohibited by law, as well as being covered under the
general prohibition against misrepresentation.
Twisting is illegally inducing a person to drop existing insurance in order to purchase similar
coverage with another agent or company. Misrepresenting a policy or making incomplete
comparisons of policies to induce a policyowner to change or replace an existing policy is called
twisting. The primary hallmarks of twisting are deceit and misrepresentation--deliberate attempts to
make a prospect believe something other than the truth, either by omitting details or by making false
Although twisting applies largely to life insurance policies, most states have regulations in place
that require agents and brokers to provide policyowners with enough information to make an
informed decision concerning the replacement of any existing policy.
If an agent convinces a prospect to replace a policy with a new policy from the same company
and if the replacement policy is not in the client’s best interest, the agent is guilty of churning.
The typical churning "victim" would be someone who has a significant amount of cash value
and/or accumulated dividends in an existing policy.
Churning holds no benefit for the client and is forbidden. Financial sales professionals who
practice it are acting unethically. The sales professionals must be guided by the client's interest
with respect to his or her objectives and financial situation.
No ethical agent would replace a policy that the prospect already has with another one when the
replacement will cause the prospect some harm. But there are situations in which a policy
legitimately should be replaced.
The unscrupulous act of twisting should not be confused with policy replacement. State laws
recognize that sometimes a replacement may be in the policyowner's best interest, and they do
not prevent an agent from replacing one insurance policy with another, provided the transaction
is handled precisely in accordance with required procedures which include:
• Proper completion of the appropriate forms by the agent. These forms must be signed
by the insured, acknowledging that he or she is aware that coverage is being replaced
by the new coverage being purchased. Typically this procedure includes returning the
existing policy (or a signed Lost Policy Release) to the current insurer along with proof
that a new insurance policy (in the form of a binder or a copy of the declarations page) is
Sometimes a prospect will make the decision to change insurers or drop one policy for another even when
the agent advises against this action. If the prospect is capable of making decisions, and if the agent is
certain that the prospect fully understands both contracts, then the decision rests with the prospect,
and the agent's actions are not unethical.
Though it is sometimes necessary to replace a policy, replacing one policy for another to earn a
higher commission for the agent is unethical.
Another reason an agent might replace a policy has to do with the fact that at times agents will
change employers. When an agent chooses to move to a different company or agency they
attempt to take the clients that they served in the past often with them. Since insurance policy
decision are often made on the perceived trust a client has in an agent, an agent might feel that
the client doesn't belong to their former employer but to them. Whether this is ethical or loyal is
a difficult question to answer and since the new agency likes the new business that this
generates, they usually never question where business is coming from. Again, the client's
interests should guide any decision to replace an existing policy.
Company stability is a third reason for policy replacement. If an agent feels that a company is
experiencing financial troubles, they may wish to change the client's policy from that company to
try and protect their client.
Replacing policies occurs frequently. Whether it is done for ethical or unethical reasons the
consumer has some peace of mind knowing that insurance laws exist to protect them and not
One of the major reasons that some types of policies (particularly life and health/disability
insurance) are replaced by the writing agent is because, the first year commission was high, but
the commissions from the second year on are considerably lower. By replacing their business
every year or even just every two years, agents are able to keep their commissions high. This
is usually a disservice to the client, especially if preexisting conditions played a part in the
An agent should always be slow to replace an existing contract of any type. Any time an existing
coverage is being replaced with a new policy, continuity must be considered. The old plan
should never be dropped until the new plan is firmly in place. The new policy should actually be
in hand and reviewed for accuracy before the old policy is dropped.
A complete comparison with respect to a life insurance policy replacement requires that the
consequences of any replacement be made clear to the policyowner. It must be explained that:
• The suicide and incontestable provisions begin anew
• The previous policy's cost basis may be lost
• Adverse tax consequences could result
s been adopted in certain states concerning life insurance replacement
requirements and is expected to be endorsed by the National Association of Insurance
Commissioners (NAIC) as model legislation for other states. The legislation is a significant
departure from existing replacement regulations that have been on the books for many years.
This insurance replacement legislation requires that these steps must be taken for every life
insurance policy replaced:
• Insurers must have internal procedures in place to handle replacements and a
company officer responsible for monitoring and enforcing them.
• Applicants are given a 60-day period following the replacement sale during which
they can change their mind and have their initial premium returned. It is during this
60-day cooling-off period that replacing companies must implement additional
• Insurance sales professionals are required to obtain a list of all of the applicant’s
existing life insurance and annuity contracts, and must provide the applicant with a
form that defines the scope of a life insurance replacement. Both the sales person
and the applicant must sign the form.
• If replacement occurs or is likely to occur, the replacing insurance professional must
complete a statement disclosing specified information about the new policy and submit it
with the life insurance application. An insurer whose agent is replacing existing life
insurance must reject any application received that isn’t accompanied by the necessary
THE LEGAL ASPECTS OF POLICY REPLACEMENT
To be legal, policy replacement must generally meet certain procedural requirements. With
replacement, as with any other violation of regulatory codes, "ignorance of the law is no
excuse." Agents are responsible for knowing what the law is and for abiding by it. Besides,
even if an agent never engages in any sales activity that involves replacement, the policies he
or she has sold may be subject to replacement by other agents.
The specific procedural requirements for sales involving replacement vary somewhat from state
to state, but they are similar in many respects. Agents must acquaint themselves with the
particulars of the laws for the states in which they do business.
Generally, replacement is defined to include not only cases where existing coverage is dropped
in favor of a new policy, but just about any situation in which an existing policy will be reduced in
value or used to fund another life insurance policy.
There are usually only a few exceptions from the general definition of replacement. In such
cases, certain of the procedural requirements are modified as appropriate. However, agents
must still comply with the provisions that require certain disclosures to be made to the client.
The first procedural requirement of most replacement regulations is that all life insurance
applications contain two statements, one signed by the applicant and one signed by the agent,
indicating whether replacement of any existing policy is intended in connection with the
purchase of the new policy.
If replacement is intended, the agent must give the client a "Notice Regarding Replacement of
Life Insurance." In most states, this notice must be signed by the applicant, the agent, or both.
In some states, the notice is lengthy and detailed. In others, a shorter version that covers the
same essential information in less formal language is used. Some states have made further
modifications to the notice-for example, to include a note to the consumer that he or she should
read the notice carefully before signing it.
A sample of the simplified version of the "Notice Regarding Replacement of Life Insurance"
Notice Regarding Replacement of Life Insurance
Are you thinking about buying a new life insurance policy and discontinuing or changing an
existing one? If you are, your decision could be a good one-or a mistake. You will not know for
sure unless you make a careful comparison of your existing benefits and the proposed benefits.
Make sure you understand the facts. You should ask the company or agent that sold you your
existing policy to give you information about it.
Hear both sides before you decide. This way you can be sure you are making a decision that is
in your best interest.
We are required by law to notify your existing company that you may be replacing your policy.
You are urged not to take action to terminate, assign, or alter your existing policy until your new
policy has been issued and you have examined it and found it acceptable.
Agents are also required to obtain a list of the policies to be replaced and to submit this list to
their insurance company with the application. The application must also be accompanied by a
copy of the signed "Notice Regarding Replacement" and a copy of any sales material used in
the presentation to the client. Usually, a copy of the sales material must also be left with the
Duties of Companies
In addition to requiring their agents to comply with the procedures just described, companies
copy of the sales proposals used. Some states have additional requirements, such as sending
a policy summary of the replacement policy to the client, or verifying the accuracy of the sales
proposals used. In most states, companies must also keep all records pertaining to the
replacement on ffle for a certain period of time, such as three years.
Consequences of Illegal Replacement
The consequences of not complying with replacement requirements, or of twisting or churning,
can be severe. Agents can be subjected to investigations or hearings conducted by the
insurance department, the result of which may be censure, substantial fines (up to $25,000 in at
least one state), and temporary suspension or permanent revocation of the agent's license. In
addition, if the insurance department finds that the agent's company knew or should have
known about the agent's actions, the company may be ordered to pay fines, reimburse
policyowners, and dismiss certain employees. The company and the agent may also be subject
to civil lawsuits filed by policyowners, for which they may be required to pay actual and punitive
damages. Punitive damage awards can be very high.
If the public perceives that the practice is widespread, illegal replacement also invites federal
intervention to solve the problem. Such intervention might be designed to discourage all forms
of replacement, even those that are in the client's best interests. For example, as part of its
intervention into the regulation of Medicare supplement insurance, the federal government
prohibited the payment of first-year commissions on any Medicare supplement sale involving
replacement. Life insurance agents clearly have a stake in helping to assure that replacement
sales of life insurance are not perceived to be similarly abusive by their very nature. To head off
such a perception, life insurance agents must make sure they adhere to the ethical standard of
putting the client's best interests ahead of their own self-interest in any life insurance
Ethical Consequences for Senior Clients
Insurance replacement may have special ethical consequences when recommended for the
senior clients which arise principally because:
• Insurance premiums are generally age-related, and the older ages of senior clients
almost always mean that replacement insurance involves higher premium costs
• An insurance applicant’s health tends to decline as he or she ages. Since both an
insured’s morbidity and mortality are functions of an insured’s health, the older
applicant may be unable to purchase needed insurance or to obtain
the replacement insurance at an affordable premium
It is vitally important—particularly for individuals of advanced age or whose health may not be
perfect—that, before any existing coverage is terminated, replacement coverage be firmly in
place. Furthermore, since coverage may be rescinded during the contestable period for
misstatements on the application for coverage, the application for replacement coverage should
be thoroughly scrutinized by the applicant to ensure that any and all health history questions are
answered completely and correctly.
cement is both a legal and an ethical issue. When replacement is done illegally, it is
always unethical. When it is done legally, the professional life insurance agent must still be
careful to make sure that the replacement meets ethical standards, which would include
adherence to the agent's duty to disclose all material information and always act in the best
interests of the client.
THE ETHICAL ASPECTS OF POLICY REPLACEMENT
To determine the ethical dimensions of an action, it is often useful for an individual to look
beyond himself or herself and to assess the wider implications of a given course of action. In a
replacement situation, the parties that are affected include those in the following list.
• The policyowner
• The company that issued the existing policy
• The agent who sold the existing policy
• The company that issues the replacement policy
• The agent who sells the replacement policy
• American Council of Life Insurance ACLI (202) 624-2411
• American Institute for Chartered Property/Casualty Underwriters AICPCU (610) 644-
• Independent Insurance Agents Association IIAA (703) 683-4422
• Life Insurance Market Research Association LIMRA (800) 235-4672
• Life Underwriter Training Council LUTC (301) 913-5882
Sometimes known as Liability Without Fault, it is imposed where public policy demands that a
person be held liable for specific acts, even if they were neither intentionally nor negligently
References to social issues involving insurance policies and insurance rates.
A term used in insurance to indicate that it is a one-sided contract typically favoring the
insurance company since they drafted it.
The approach step in the sales process is generally the first meeting of the practitioner with the
prospect. The purpose of the approach step of the sales process is to cause the prospective
client to come to the understanding that the practitioner is someone with whom he or she may
want to do business as a result of the rapport that has been created.
The risk experienced by an insurance company when only those most likely to experience
claims keep the policy in force. Those least likely to have claims have canceled or lapsed their
An act of violence or the physical threat of violence. It is not the same as battery because
assault only requires apprehension over threatened contact, not contact itself. 2-3
A “balanced” comparison is one that compares all of the important features of the products and
examines the advantages and disadvantages of both products.
The intentional, umpermitted and unprivileged contact of one person by another. It includes not
only the person themselves, but also their clothing, packages they are carrying and vehicles
they are in.
Umbrella policies in the marine field.
Caveat emptor is a term that encapsulated the judicial approach to product liability in the first
half of the 20th century. The term translates to “let the buyer beware.”
Caveat vendor translates to “let the seller beware.” It represents a heightened product and
process liability on the part of sellers.
Churning is the practice of excessive trading in a client's securities account for the primary
purpose of generating commissions for the practitioner. The practice holds no benefit for the
client and is forbidden.
Punitive damages which are awarded to plaintiffs in excess of full compensation. Also refer to
Comprehensive Ceiling Coverage:
Developed by Lloyd's of London, it is a combination of both all-risks property and all-risks thirdparty
liability coverage in a single excess contract.
This means that there is a continuing relationship created between the insured and the insurer.
Each must keep a specified condition in order to keep the policy in force.
Often protected from liability claims under privilege laws.
The intentional interference with the personal property of others.
Refers to the contractual obligation of the insurance company. It is the amount the company
agrees to pay to indemnify the insured for claims brought against them, and for which they are
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Sections of a policy which identify the persons involved, what is insured, premium amounts and
the length of time insured. They are the "who, what, when, where, and why" of the policy.
Injury to one's reputation. It may be either libel or slander.
Each policy lists commonly used terms and phrases to clarify contract meanings.
This means that the insurance company who issued to umbrella policy must defend or settle
any covered claim or lawsuit that is brought against the insured for property damage or bodily
Dual Risk Contribution:
When responsibility is shared by more than one person or party.
the analysis of a particular company's products, performance and financial standing.
Not to be confused with egotist, it is a person who believes that self-interest is the basis of all
behavior. Egoism is not self-absorbed necessarily, as an egotist would be.
the complete understanding of another's feelings, but not necessarily approval or condolence.
A means by which an insurance contract can be changed or altered, usually after it has been
Literally means insurance coverage with high limits used to supplement basic policies. It is not
necessarily the same as Excess Liability Coverage.
Excess Liability Insurance:
The name often used for Umbrella Insurance Coverage.
Excess Personal Liability Coverage:
Umbrella policies placed on an individual rather than a business. There are also excess
coverages which are not always aimed at liability coverage.
Varying from policy to policy, exclusions are the risks not covered. They are usually disclosed in
a separate section of the policy and are labeled Exclusions.
Although sometimes accomplished in a separate meeting, fact-finding often flows directly and
easily from the opening interview and is an extension of it. The object of the fact-finding
interview is to gather sufficient information to support a recommendation that is suitable to the
client’s situation and consistent with his or her objectives and tolerance for risk.
The intentional restraint of another's freedom of movement. To bring about a claim, the
imprisonment must be total.
A fiduciary duty is a duty that results from the holding in trust of something of worth for another.
A person with a fiduciary duty is generally held to a higher standard of performance.
Typically this includes pain and suffering.
The implication through language or physical gestures that something will or will not be so,
without actually stating it.
This means the insurance company pays for claims which to insured is legally liable for which
have resulted form the policy's covered perils, to the limits of liability purchased.
The type of policy that an umbrella policy is; it protects the insured for a wide variety of insured
losses for which they are legally liable.
Outside companies hired by insurance companies to aid in their underwriting process.
Inspection companies supply information.
The promises made by the insurance company to pay for certain financial losses, under specific
Intentional Interference With The Person:
Battery, assault, infliction of mental and emotional disturbance, defamation and false
Intentional Interference With Property:
Trespass, conversion or other intentional actions which deprives the owner of use, enjoyment or
possession of their property.
An intentional act which causes injury to another. The injury sustained may not necessarily have
been intentional; only the act itself was.
To enter into any agreement, the signing parties must be legally competent to do so. This does
not necessarily mean an adult party. In some cases, the person considered legally competent to
sign a contract must be an officer of a corporation, for example.
Legal documents, such as insurance policies, which are entered into by two or more entities
after agreeing to the terms involved.
The legal purpose of the contract or document. The purpose of some contracts would be illegal
Also called third-party forms, it is a contract between an insurance company and the insured to
benefit a third party (the injured person).
Liability Without Fault:
Another name for Absolute Liability.
Defamation which is written, rather than spoken (which is slander). With the emergence of EMail,
fax and other forms of communication, this has become a difficult distinction.
Life insurance illustration
Life insurance illustrations are hypothetical constructs that show how the policy would perform
under a given set of financial assumptions. The assumptions upon which any illustration is
based may not prove to be correct. Life insurance dividends, costs and interest rates will
almost certainly not be as illustrated and may be higher or lower than shown.
This group of individuals process the day-to-day applications submitted to the company and are
responsible for acceptance or rejection of applicants.
The malicious institution of groundless criminal proceedings against another person.
severe and extreme distress caused from intentional acts; usually actual physical illness must
Although not exempt from liability claims, they may sometimes be successfully claimed as
Policies which are issued but with changed or restrictions in the policy due to the information
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Law requires that all persons use care in their actions. If a person fails to perform as a
reasonable and prudent person would under similar circumstances, they have acted negligently.
Claims result from negligence in some form.
The ability to form who and what we are from man's basic means of survival-reasoning. As a
theory of ethics, it holds man's life as the standard of value and his own life as the ethical
The first substantive interview in the sale process is usually the opening interview. The principal
function of the opening interview is to continue to develop the rapport created in the
approach step. The opening interview leads directly into the fact-finding interview.
Where allowed by law, legally binding contracts that are spoken rather than written. Insurance
contracts can never be oral.
Anything capable of being owned other than land and the items attached to it. Personal property
would include vehicles, clothing, jewelry, etc.
This happens after the risk has been accepted by the insurer. It is the process of reviewing
those already insured and terminating those no longer desirable, if termination is possible under
the laws of the state where issued.
An applicant or policy that appears to have a lower-than-average loss expectancy. These
applicants often pay a lower premium rate.
The value placed on the promise of protection against specific financial risks. No policy is valid
unless the premium is paid.
The purpose of the presentation interview is to present to the prospect a solution to a need that
he or she has admitted having. It is the matching of an insurance or investment product to the
Those policies which pay first. With umbrella insurance policies, those tend to be homeowners
and automobile policies, which will pay before the umbrella policy does.
An activity which does not bring about liability because the person has acted in a manner which
served public interest, even though it may have caused an injury to another person or property.
Three components are necessary for an occupation or business to be considered a profession:
1. Specialized knowledge
2. A “service before income” outlook
3. A code of professional ethics
When action or reasonable force is necessary to protect another from harm, making the act
Prudent Man Rule:
See Reasonable and Prudent Person.
Any action or occupation which could adversely affect the public's well being.
Considered to be a statement of punishment; awards, which tend to be very large, that are
granted to plaintiffs for injuries sustained.
land and the items attached to it.
Reasonable and Prudent Person (The Prudent Man Rule):
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One who acts in a specific manner under specific circumstances to prevent harm to another or
to another's property. A reasonable man is assumed to have the minimum perception, memory,
experience, intelligence, mental capacity and information common to the community in general.
The care that an ordinary prudent person would take in similar situations. This implies the use of
the Prudent Man Rule.
Rebating involves the giving or promising of a valuable consideration intended to be an
inducement to the buyer to purchase an insurance policy. The inducement may be cash or any
other item of value. Generally, any gift greater than a nominal one could be considered a
valuable consideration and a violation of rebating rules.
Registered Investment Adviser (RIA)
A person involved in the sale of financial advice or counsel for a fee. An RIA must be registered
with the SEC or the states in which he or she does business, depending upon various criteria.
This must often be determined by the courts; it is used in reference to actions which were
necessary to protect another person from harm.
The process of offering a portion of the business to other insurers, who then assume the risk for
the amount they insure.
The umbrella policy's deductible amount which must first be covered by either the insured or
another primary policy.
The sum total of the steps taken in the sale of a product or service.
Defamation which is spoken, rather than written (which is libel).
awards based on specific losses with specific monetary values.
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This group of underwriters determine the company's general underwriting requirements, but do
not necessarily become involved in individual applications.
An applicant or policy which is considered to be average in the possibility of claim loss.
Typically applied to product liability, it is the type stated for faulty products, even if the
manufacturer had no intentional negligence.
An applicant or policy that appears to have higher-than-average loss expectancy.
compassion; agreement; condolence.
Another name for liability insurance since the contract between the insured and the insurance
company benefits a third party.
From the past participle of the Latin word torquere, it is any private or civil wrong by act or
omission for which a civil suit can be brought, but not including breach of contract.
This involves real property rather than personal property. It is the wrongful entry upon the land
of another or the failure to remove property from another's land when an obligation exists to do
According to Jane Bryant Quinn, it is "a policy which covers liability judgments that exceed the
limits of your auto and homeowner's policies." Umbrella policies usually give broader coverage
than do excess policies.
Made up of two categories, underwriters determine who will receive a policy and who will not
This means the insurer makes an enforceable promise to meet its contractual obligations. The
insured makes no promises that he or she can be legally compelled to keep.
“Vanishing premiums” is a concept that is often the cause of customers’ claiming unethical sales
practices. It involves the payment of life insurance premiums through the use of policy
This might be referred to as going beyond the call of duty. It might also be called moral