The Life, Disability and Health Insurance Agent

There are many ways to define the term insurance agent. Fundamentally, an insurance agent is a licensed individual who solicits sales for an insurance company, or a number of insurance companies. The agent is subject to the state licensing laws of every state in which he sells life, health and disability insurance.

Captive v. independent agent

If an agent is licensed with only one company, he is referred to as a captive agent. And he can only sell the insurance products of that company. If he is licensed with many companies, he is referred to as an independent agent because he is not restricted to selling the products of only one company.

But every agent can only sell the products of companies for which he is licensed to sell. This is important for you to know because an independent agent who can sell for many companies, if he is conscientious, has a better likelihood of selling you the best product to meet your insurance needs because he has more products from which to choose. In order to make the sale (and earn the commission), a captive agent may try to convince you that his company’s product is the best for you when in fact there are better products for your situation in the marketplace.

American Council of Life Insurers (ACLI)

The conduct of insurance agents has come under closer scrutiny in recent years as a result of the initiation of numerous class action law suits alleging inappropriate and inaccurate sales presentations by insurance agents. In response to this, organizations such as the American Council of Life Insurers (ACLI) and the National Association of Insurance Commissioners (NAIC) have proposed model regulations, market conduct principles and use of databases to improve agent practices.

The ACLI is an association of life insurance companies through which the industry is attempting to police itself.

Relationship between agent and insurance company

The law of agency, a separate and distinct area of the law, applies to the relationship between the insurance agent and the insurance company. A basic rule of agency law is that the principal is liable for the acts of its agents done within the scope of their agency authority. It is not to the life, health or disability income insurance company’s benefit to have agents who are acting inappropriately or illegally while they are representing the insurance company. Lawsuits against the agent invariably include the insurance company as a co-defendant for two reasons–because of the principal/agent relationship and also because the insurance company usually has deeper pockets than the agent.

Why is agency law important to policyholders? Because, unlike property and casualty insurance (homeowners and auto), the agent who sells life, health and disability income insurance is almost always regarded as the legal agent of the insurance company. Therefore, as a general rule, any wrongdoing by the agent, such as incorrectly completing your application for life, health or disability insurance, will legally be regarded as wrongdoing by the insurance company. In laymen’s terms, the insurance company of a life, health or disability income insurance agent is responsible for the acts of its agents while they are selling insurance to you. (Of course, if you are conspiring with the agent to cheat the company, that’s a different story.)

State Insurance Department or Commission

Every state in the nation has an insurance commissioner. They normally report directly to the governor of the state just like the attorney general of each state reports to the governor of that state. The NAIC is an association of all the state insurance commissioners. The NAIC spends a lot of time drafting and holding hearings on new model laws and regulations for the insurance industry. This work of the NAIC has a gone a long way toward providing some degree of uniformity between the insurance laws and regulations of the various states. Their work has also acted as an impetus for the implementation of laws and regulations when a new area of significant need arises. Recently that area of need has been the sales methods of agents.

Insurance agents must obtain a license from each state (through the insurance commissioner’s office) in which they are soliciting business. If an agent is not a resident in a state in which he wishes to sell insurance products, the agent may ordinarily obtain a nonresident license from that state. You can check on the licensing (or disciplinary) status of your agent by simply contacting the insurance commissioner’s office of your state. Agents who sell variable life insurance products or other investment-related products must also obtain a license from the

National Association of Securities Dealers (NASD).

Revocation of agent’s license

An insurance agent can have his or her licensed revoked or suspended for number of reasons, including fraud, embezzlement, and forgery. Insurance agents can also lose their license for an activity the insurance industry refers to as twisting. Twisting happens when your agent improperly pressures you into dropping your existing insurance so he can sell you a new policy. His primary motivation for selling you the new policy may be so that he can get the first year commission on the new policy. To motivate agents to bring in new business, insurance companies usually offer a high first year commission that is dramatically reduced for the second and later years of the policy. However, if the policies are relatively similar, there are disadvantages to you in canceling your old policy and buying a new policy. For example, the incontestable (time limit on certain defenses) and suicide periods in your old policy may have expired. They will start anew with your new policy, which is not to your advantage.

Another practice that can result in the agent forfeiting his or her license is rebating. This occurs when an agent forks over to you, directly or indirectly, a chunk of his commission or its equivalent, such as a rebate of the policy fee, a valuable gift (such as prime tickets to a big game) to induce you to purchase a policy from him.

If you believe your life or health insurance agent has engaged in fraud, embezzlement, forgery, twisting, rebating, has made an inappropriate or inaccurate sales presentation to you or is not properly licensed with your state insurance department and, if necessary, with the NASD, you should contact an attorney to protect your rights.

Case Studies: Unethical Practices in the Insurance Industry

Case Study 1: Misrepresentation and Fraud

An insurance agent deliberately misrepresents the terms of a life insurance policy to a client. The agent assures the client that the policy includes a specific coverage feature that would provide substantial benefits in case of disability.

However, upon reviewing the policy documents later, the client discovers that the promised coverage was never included. The client is left feeling deceived and financially vulnerable due to the agent’s fraudulent representation.

Case Study 2: Coercive Selling Techniques

An insurance agent uses high-pressure tactics to convince an elderly couple to purchase an expensive long-term care insurance policy. The agent preys on their fears and manipulates them into believing that without this specific policy, they will face dire consequences if they require long-term care in the future. The couple, feeling coerced and fearful, reluctantly agrees to purchase the policy, despite it being financially burdensome and potentially unnecessary for their situation.

Case Study 3: Rebating and Kickbacks

An insurance agent offers a cash rebate to a client as an incentive to purchase an auto insurance policy from their agency. The client, enticed by the rebate, decides to switch insurers and takes advantage of the offer. However, unbeknownst to the client, the agent inflates the premium amount to cover the cost of the rebate, resulting in the client paying more for the policy than they would have with their previous insurer. The agent’s unethical rebating practice ultimately disadvantages the client financially.