Although the public sometimes views the insurance industry as an impersonal entity, dedicated insurance professionals will likely denounce that image as a major misconception and proclaim that the insurance business involves much more than working with claim forms and actuarial data. Veterans in their field have probably learned that much of an insurance producer�s job pertains to the development of relationships with the public and that countless professionals nurture such relationships every day by assisting individuals, families, businesses and various groups in the procurement of coverage for personal, commercial and industrial needs. Most of those professionals should agree that without those solid relationships, consumers have little incentive to trust an insurer to protect them, their loved ones or their businesses from financial risks and that one of the most reliable ways for an insurance producer to earn trust is to behave in an ethical manner toward every customer. Besides the personal satisfaction that can come from treating others ethically, this sort of behavior often translates to success at work. An employer wants to trust employees and is likely to favor workers who do their jobs without being swayed by self-interest. And the average person, particularly in regard to such an essential product as insurance, is more likely to do business with an outwardly ethical organization than with a company that seems to disregard ethical conduct.
Perhaps the most visible members from the insurance world and the ones most capable of shaping the average person�s perception of the insurance industry are insurance agents and brokers. The terms �agent� and �broker� are common in various parts of the professional world. One can hear those words in conversations related to real estate and investments, to name only two examples. It must be noted, however, that the definitions of the terms can vary from one field to the next and that, contrary to popular belief, agents and brokers do not have identical job duties. In fact, they perform importantly distinct functions with differing ultimate goals. In terms of insurance, both agents and brokers examine a consumer�s requests and serve as intermediaries who set up prospective insureds with coverage from an insurance company. The important difference between the two professionals involves the people who they ultimately represent in an insurance transaction. Whereas a broker is ultimately a representative of the insured, an agent�s ultimate responsibility is generally to a specific insurer. Simply put, a broker is paid to act in the consumer�s best interest, while the agent is paid to act in the insurer�s best interest.
Despite those important differences, ethical insurance producers do not simply devote themselves to the people who pay them and ignore potential responsibilities to other parties in an insurance transaction. The majority of brokers do not lick their lips in anticipation of deceiving insurers so that their clients can reap benefits, and most agents do not take predatory stances toward consumers in the hopes of selling deficient or unnecessary policies. It is perhaps best to view agents and brokers as one might view any responsible employee of a legitimate business. For example, a consumer cannot expect a decent appliance salesperson to encourage customers to visit a competitor�s store for a better deal on a television, but the consumer can still expect knowledgeable, honest and friendly service.
Like other true professionals, insurance agents and brokers endorse good-hearted attributes such as honesty and integrity. They generally agree that ethical professionals serve people other than themselves, take great care when trusted with other people�s money and avoid (or at least disclose) conflicts of interest. And yet, a deep examination of modern insurance issues and practices indicates that even though insurance producers have a common base for ethical standards, they have not necessarily had opportunities to apply ethics to many concrete aspects of their jobs. Perhaps, understandably, they become distracted by the many other issues affecting the healthful maintenance of their business and are therefore unable to act as ethically as we would otherwise expect.
Professional insurance producers know their business and are more than likely aware of the fact that more and more consumers have purchased coverage to protect themselves from lawsuits concerning fiduciary duties (activities related to upholding trust, including careful handling of funds). With consumers willing to fight in court against businesses that ignore such duties, many agents and brokers have worried about their own liability when customers or clients have sour insurance experiences. When insureds suffer losses that their policies do not cover, they sometimes cite their agents or brokers as the primary sources of fault. An increasing prevalence of suits against insurance producers has left many agents and brokers in legal and ethical dire straits. They certainly want to provide excellent service to consumers, but sometimes it seems as if purposely avoiding certain aspects of ethical service is a necessary way of fending off litigation. Various court rulings have affected producers� pursuit of ultimate ethical goals, and not simply because judges have been too hard on the industry. The problem for insurance producers is that there is no indisputable precedent set by a court that clearly spells out what insurance producers must do in order to fulfill their fiduciary obligations to policyholders and insurance companies.
Although many courts have viewed producers as specialists with a wide range of responsibilities to customers and clients, the perceived legal duties of agents and brokers have not always been so extensive. Insurance agents (who serve the interests of insurers) probably frowned at the New York Supreme Court�s ruling in the 1939 case Recht v. Graves, in which life insurance agents claimed that, as professionals, they did not need to adhere to certain state laws regarding business taxes. But the court�s decision that agents were �engaged in the practice of a business or occupation and not in the practice of a profession� perhaps inadvertently gave agents great legal protection. As business practitioners, their obligations to their customers were no more complex than those expected from a general business. Like other businesspeople, insurance agents could not lie or steal from their clientele, but they did not need to do much more than give the people what they requested or ordered. Based on this business designation, agents presumably would not have been liable for selling a person an inferior or unnecessary form of insurance as long as the person had requested it.
In a duty-specific case before the Wisconsin Supreme Court in 1990, the plaintiffs in Nelson v. Davidson alleged that their State Farm agent had an obligation to inform them that they could have purchased underinsured motorists coverage. They based their case on the fact that courts in other states had held agents responsible for advising consumers of available insurance products. In its ruling for the defense, the court wrote that the plaintiffs did not present any relevant examples of Wisconsin courts agreeing with those other decisions and stated that �the vast majority of other jurisdictions hold that the general duty of care which an insurance agent owes a client does not include the obligation to advise of available coverages.� So, if an agent was insuring a building in a neighborhood with a history of arson, that agent might have chosen to disclose the area�s history to the property owner for ethical reasons or to entice the owner to buy more coverage, but it is unlikely that the mentioned court would have held the agent responsible for fire damages if he or she had kept quiet about the risk.
A 2001 appellate division case in New York, Chase�s Cigar Store, Inc. v. Stam Agency, Inc., materialized when a cigar store employee stole money from the company and the loss was not covered by the owner�s insurance policy. Allegedly, the policyholder allowed the agent to craft the details of the policy himself and did not ask for protection against employment dishonesty. The business owner filed suit against the agent for not securing the coverage, but the matter was dismissed on the grounds that the agent followed the customer�s instructions, had no obligation to include employment dishonesty protection within the policy and allowed the business owner to review the policy terms, which clearly excluded employment theft and dishonesty.
Another real-life case, Hardt v. Brink, involves a somewhat similar situation but one in which the judicial system placed greater responsibilities upon insurance producers. In this example, a plaintiff had secured insurance through the defendant agent since 1947 and had purchased, among other products, a comprehensive liability policy from the man. In 1956, the plaintiff told the agent that he had entered into a lease agreement for a building. A year later, the building suffered severe fire damage, but the losses were not covered by the liability policy because of an exemption for rented property. The plaintiff sued the agent for not alerting him to a major liability gap and won his case in a U.S. district court in the state of Washington in 1961. Instances such as this one show that some courts reason that an insurance producer must not only help clients obtain what they ask for, but also must take on the greater duties of understanding and pointing out a customer�s or client�s insurance needs.
Unfortunately for those insurance producers who want clear legal guidance regarding how to serve the public, even courts that have agreed that agents and brokers have advisory duties to customers and clients have not arrived at exactly the same conclusions. Some courts have determined that the way insurance producers present themselves to the public dictates their professional obligations. For a simple example, let us focus on job titles. Some people believe that individuals who identify themselves as insurance salespersons or agents are merely that; company representatives who offer coverage and take applications, but who are under no obligation to advise anyone. Conversely, people who call themselves investment advisers or risk managers have, in many cases, been expected to perform many service-oriented tasks because those job titles are commonly associated with expertise.
Many courts, when determining an insurance producer�s duties, have based rulings on the existence of what is generally referred to as a �special relationship� between the agent or broker and the customer or client. If a special relationship exists, the insurance producer�s obligations (not to mention potential liability) increase. If no such relationship exists, the producer is generally exempt from having to advise people or pursue anything more than what a consumer requests. However, different courts have considered different factors when judging the presence of a special relationship.
In some situations, an insurance professional�s job title and the qualifications implied by that title are enough to substantiate an insured�s special relationship claim. At other times, courts have intricately examined details of a case in order to determine whether or not agents or brokers have committed themselves to special relationships and to all the work-related and legal-related issues that these arrangements entail. In the 1988 case Durham v. McFarland, Gay & Clay, Inc., the Court of Appeal of Louisiana, Fourth Circuit ruled an agent was liable for hurricane damages because he did not do enough to insure the plaintiff against residential flood risks. The court based parts of its decision on the fact that the plaintiff had been a customer of the defendant for roughly 15 years and the fact that the defendant (who was repeatedly instructed to transfer coverage to the residence) knew for an extended period of time that the property was not adequately covered for flood risks.
Other courts seem to have ignored circumstantial special relationships and used broad brushes to paint all insurance agents and brokers as mandatory providers of advice and various fiduciary services. In Saylab v. Don Juan Restaurant, Inc., a 2004 case heard by the U.S. District Court for the District of Columbia, a broker (a professional serving the interests of consumers) obtained a general liability policy for a dining establishment. When drunk drivers who had become intoxicated at the restaurant killed two people, families sued. Once the general liability policyholders realized liquor liability was excluded from their coverage, they took legal action against the broker for not addressing their potential need for such insurance. In the opinion of the court, insurance brokers, regardless of any special relationship, were more than just average insurance representatives. They were professionals with expertise who should not be easily let off the hook for failing to advise clients of insurance needs or gaps in policies.
Additional courts have had similar views on the obligations of insurance agents. In Riddle-Duckworth, Inc. v. Sullivan, the Supreme Court of South Carolina stated in 1969, �[T]he respective duties and obligations arising from the relationship of a principal and his agent in the procurement of insurance must be determined in the light of the fact that the agent was an expert dealing in a highly specialized business, with knowledge and means of knowledge not possessed by the average applicant for insurance.�
In the 1995 case Southwest Auto Painting and Body Repair, Inc. v. Binsfeld, heard by the Court of Appeals of Arizona, an agent did not bring up the subject of employee theft and dishonesty coverage. In its ruling against the agent, the court referred to the testimony of an insurance expert:
�The expert testified that the standard of care in the community for professional insurance agents requires agents to advise clients about the relevant types of coverage that are available and the cost of the coverage, either in a written confirmation of information given orally or in a written proposal handcrafted to the individual needs of the prospective insurer.�
Because insurance producers have important business obligations, it is fair, up to a point, to apply the concept of �caveat emptor� (a Latin phrase that means, �Let the buyer beware�) to disputes between consumers and insurance producers. It is logical to expect intelligent prospective policyholders to take the time to educate themselves about their insurance needs and about the products that might best suit those needs. But it is also logical for intelligent prospective policyholders to view an insurance agent or broker as the best educator for them. After all, the insurance agent or broker has specialized, professional experience, can better answer to consumer questions than written research materials and is probably the most accessible source of insurance information available to the average person.
Obviously, this is an ethics course, and opinions concerning which acts are ethical and which acts are unethical can differ from generation to generation, from culture to culture and from person to person. Studies of ethics are generally not structured around set-in-stone rules that firmly and universally state what is right and what is wrong. The study of ethics endures through the centuries because it involves choices that can often be debated as being both right or wrong depending on a person�s values and one�s life philosophies. A writer could fill the following pages with summaries of numerous ethical theories and examples of how each of those theories could apply to the duties of insurance agents and brokers. But the insurance community might not yet have reached a time when that sort of text should be written or studied, at least not as long as insurance producers have to worry about how an inconsistent judiciary will view their actions. Rather than an abstract examination of philosophy, today�s insurance producers deserve and need something practical that will instruct them on how to protect themselves from lawsuits without compromising customer service. Yet, due to the subjectivity of ethical beliefs and the differing opinions of various courts, we will struggle to decipher truly practical guidance unless we allow ourselves to make two assumptions in regard to this topic: one about ethics and one about laws.
From an ethical standpoint, let us assume, for the next few pages, that insurance producers collectively subscribe to the �golden rule,� a theological concept that has gained tremendous acceptance in secular society and instructs, �Do unto others as you would have them do unto you.� For insurance producers, morally subscribing to the golden rule requires agents and brokers to put themselves into the policyholder�s shoes. When the producer shops for an important item, he or she probably wants to be served by helpful professionals who go out of their way to understand a customer�s needs, who do their best to set the customer up with products that best address those needs and who offer crucial advice (solicited or otherwise) that pertains to potential risks and overall customer satisfaction.
From a legal standpoint, let us assume that any court is capable of interpreting an insurance producer�s duties in the broadest manner possible. This would mean that agents and brokers, in every jurisdiction, could be obligated to advise the public, alert consumers to their insurance gaps, do what they can to turn customers� ultimate insurance decisions into realities, handle other people�s money in a responsible fashion and perform various other fiduciary functions. Let us also pay close attention to the fact that agents and brokers ultimately serve one master: the insurer in the agent�s case and the insured in the broker�s case.
The information that follows makes those assumptions and respects that fact. It is intended to help the insurance producer find a balance of ethical principles and safe, legal practices. It is for insurance agents and brokers who do not want to allow their desire to stay out of court to overpower their desire to perform excellent, ethical services and who do not want their service-oriented ambitions to overpower their attention to liability risks. We have prepared this material in the hope that it can make the insurance producer firmly believe that legal concerns need not jeopardize one�s devotion to ethics. There is a legal world and an ethical world, and it is indeed possible to do business in both places at once.
Although courts and insurance professionals have had many differing opinions about what insurance producers must do in order to fulfill the requirements of their jobs, it is inarguable that an agent or broker must act with care when entrusted with insurance premiums. In many cases, a policyholder pays for coverage through the insurance producer, who must pass the funds along to an insurer and receives a specified commission. Obviously, the producer�s role as a conveyer of funds requires trust from the insurer and the insured. Insurance companies want the money that they are entitled to receive in a timely fashion, and policyholders rely on the producer�s speedy delivery of those funds to ensure that payments are not marked as late or nonexistent.
As is the case in avoiding most of the potential conflicts mentioned in this text, documentation can often shield agents and brokers from allegations of illegal and unethical acts involving premiums. It is ethical for producers to take their agreed-upon commissions from premium payments, but producers should be able to quickly prove their right to commissions and should confirm in writing that the insurance companies and policyholders understand that right. Examples of documentation that might serve insurance producers in this regard include copies of contracts that set forth commission obligations, bank deposit records, correspondence and notes taken during meetings and telephone conversations.
In the interim period between receiving premiums from the insured and sending the money to the appropriate insurer, producers sometimes have the opportunity to invest the funds in short-term accounts. These investments, when properly executed, allow the insurance company to obtain interest on the payments, which is typically applied to a producer�s commission as well. (Some insurers allow producers to hold onto premiums for extended periods of time in order to accumulate more interest.) Because the producer�s commission is usually affected by these investments, an agent or broker might face the temptation to put the money in ventures that have the potential for high rewards in exchange for high risks. Ethical insurance producers resist this desire and follow what has become known as the �prudent man rule� or �prudent investor rule.� Highly self-explanatory in name, this rule dictates that an insurance producer must invest premium payments in a smart, fiscally conservative fashion. Producers should treat the premium dollars obtained from the insured and owed to the insurance company as carefully as they would treat their own life savings. Putting the money into the stock market is a serious ethical offense because of the risks involved. Bank accounts are a safe, responsible investment vehicle for premium dollars. Other modes of investment can be deemed ethical as well, under the condition that they are not likely to deprive the insurance company of premiums it deserves.
Agents and brokers have different bottom-line responsibilities, but it can be argued that both types of professional insurance producers have ethical obligations to current and prospective policyholders. At some point in every transaction with the public, insurance producers must at least try to pursue what clients and customers want. If someone decides that he or she must have a term life insurance policy that costs a particular amount, the broker should search for a provider who can accommodate the client, and agents should return to their company and do what they can to obtain the requested policy for the customer. The insurance producer should not allow personal feelings to override a consumer�s decisions.
That does not mean that insurance producers must never use their experience and personal instincts to influence a consumer�s thought process. In fact, doing so is ethically encouraged, as long as the producer has the person�s welfare in mind. The responsible insurance producer listens to the consumer and tries to decipher what the person needs, which may or may not be exactly the same as what the consumer requests. What the prospective insured needs will differ from one individual to the next. A heart surgeon is undoubtedly susceptible to risk factors that differ from those faced by a bakery owner. If a business is being insured, producers should use their own experiences, the experiences of colleagues and the statements of the insured to learn about the risks involved with that type of venture. They should study and ask about the kinds of people with whom the insured does business as well as any agreements that the insured has made with third parties that may require specific coverage.
It is then the producer�s ethical (and, in some jurisdictions, legal) responsibility to make clients and customers understand their insurance needs. If the producer believes, based on a consumer�s situation, that a whole life policy would serve the person better than a term life policy, the agent or broker should say so and explain why. If the insurance producer recognizes risks that would not be covered based on the consumer�s stated requests, the agent or broker should disclose the insurance gap. Specifically for agents, this might mean making the consumer aware of insurance gaps that cannot be filled by their own companies.
Upon being made aware of these various pieces of information, the consumer must ultimately be the one to decide on the type of coverage for the agent or broker to procure. But the obligation to track down what the consumer requests should still not be viewed by the producer as an act of blind obedience that puts the broker, agent or insurer at a financial disadvantage. Even if a consumer hopes to obtain the cheapest coverage available, the producer can make a strong ethical case for the purchase of a more expensive policy. A producer should present a consumer with the policy that is the best value, and value is not measured in dollars and cents alone. Instead, it is measured by the quality of the coverage relative to the price. A cheap policy with big insurance gaps is not the best value for the consumer compared to a slightly more expensive policy with fewer or no gaps.
When discussing individual policies, insurance producers should make no assumptions about the consumer�s knowledge of what a policy will cover and what it excludes. Even though exclusions are documented within the policies themselves, agents and brokers should discuss these exclusions in a detailed manner with their customers and clients so that potential policyholders understand what they are buying, what risks they are managing through insurance and what risks they are still financially exposed to.
This ethical duty relates to a broader issue of knowledge and competence among insurance producers. Insurance agents should be well-schooled about the products they sell. Brokers, who will lack the in-house training that an agent might receive, should also make themselves as informed as possible of the various policies that they can provide from various companies. Of course, no insurance producer knows the answer to every question that a consumer might have about every policy. Competent, ethical insurance professionals admit when they do not have an answer for a consumer and then attempt to follow up on the query by diligently consulting a more knowledgeable source. Yet, it is not enough for the producer to give a reliable source�s answer alone. Assuming the agent or broker finds the answer to the question, he or she must clearly understand the answer and anticipate any further questions that the answer might produce in the mind of the client or customer. This is not, however, an absolute ethical obligation. Sometimes, as in many life situations, it is best to admit that you do not know the answer to a question and to advise the other person to ask a more specialized individual instead. It should go without saying that a consumer will appreciate honesty more than factually shaky advice that could lead to serious trouble in the future.
An ethical insurance producer also informs clients and customers of facts relating to their insurance status as soon as possible. If consumers apply for insurance and are denied by the provider, the agent or broker must quickly inform them of the rejected application so that alternative coverage might be secured in a timely manner. The producer should never allow anyone to assume they have been approved for coverage. In a similar fashion, agents and brokers should keep a keen eye on a consumer�s policy expiration dates and renewal deadlines. Although a producer should not renew or apply for an alternate policy on a consumer�s behalf without authorization, the agent or broker is ethically bound to inform people of upcoming periods of potential insurance gaps so that consumers can act to avoid those periods.
Insurance producers can do their jobs ethically and legally by giving the prospective policyholders a brief description of specific insurers. Agents and brokers should mention an insurer�s rating, which relates to its ability to absorb risks and pay claims. The person paying for a prospective policy might also want to know if the insurer is well-established in the industry or if it is a relatively new organization. It will be important for the person to know how closely the company scrutinizes claims and how quickly it pays legitimate ones. Because a company�s financial health and claims procedures can vary during a policy�s lifespan, agents and brokers should convey this information to consumers not just at the application stage but periodically afterward, too, as circumstances change.
These ethical disclosures are undoubtedly more challenging for insurance agents than for brokers. After all, agents represent the insurer in a transaction and are obviously expected to paint a positive image of their respective employers for the public to see. To do otherwise could jeopardize sales, endanger employment and potentially violate the concept of agency. And yet, it is not impossible to make these ethical disclosures and still uphold one�s responsibility to an employer. Agents might mention that their company is a new kid on the block while emphasizing the lower costs and comprehensive benefits of the company�s policies; or they might admit that their company takes its time when paying claims but emphasize that the company is a financially healthy institution that has professionally served the public for decades. Through such sales presentations, the road to agency commissions can still be paved with honesty.
Once the consumer has considered all relevant information and chosen a preferred policy, producers have an ethical duty to provide insurance companies with applications that are as extensive and accurate as possible so that the respective insurer can fairly assess risk and price the policy accordingly. It is unethical for agents and brokers to deceptively burden an insurer with prospective customers, regardless of their insurability, all in the name of commissions.
As one can expect, the agent has many more ethical duties than the broker in regard to an insurance company. Sometimes the dos and don�ts for an agent are clearly spelled out in an agency contract, but that is not always true. Generally, though, there are several ethical practices in which an agent should engage regardless of the specifics of the contract.
As a representative of the insurance company, the agent becomes the face of the organization for the customer. The impression that a person forms of an agent is likely to represent that person�s impression of the entire company. As a result, the agent must practice acceptable etiquette when interacting with the public. Though speaking with a customer should not entail tremendous anxiety, agents might want to behave as they would when going out on a job interview. The producer�s appearance, manner of speech and general attitude should all be relative to the appropriateness of the occasion.
Insurers expect their agents to be loyal to their company, to keep the insurer apprised of customer-related situations and to perform their jobs in an ethical and financially responsible way. On a more specific level, agents are generally not allowed to sell similar forms of insurance for competing companies while in the employment of a particular insurer. Some insurance producers, known as independent agents, are not permanently employed by one insurer and are allowed to sell policies from various companies at the same time. Independent agents, however, must disclose any existing or potential conflicts of interest before representing any insurer.
Ethical agents should also become well-versed in the internal procedures of their companies and should not overstep the boundaries of their job descriptions. Unless authorized by employers, agents do not have the power to make deals with customers. They cannot negotiate premiums, redefine the terms of a policy or unilaterally approve a person for coverage. They must understand that they are part of an organization and that performing the duties of another employee without company approval can, at worst, lead to legal trouble, or, at best, produce role confusion among co-workers and procedural disorder in the workplace.
This text stresses the many ethical and legal responsibilities of insurance producers. And yet, even though these responsibilities can make the producer�s job mentally, emotionally and physically challenging, those reading this material should understand that not all responsibilities are on their shoulders. Despite ethical duties owed to consumers, insurance producers need not handle every aspect of a transaction. As stated previously, the insurance producer is an advisor, not a decision maker. It is the insured who must choose whether or not to purchase a particular policy. It is the insured who must pay premiums. It is the insured who must provide producers with any needed documents for coverage, and it is the insured who must read and acknowledge an understanding of a policy�s terms.
Of course, no professional is immune to accusations pertaining to illegality. But insurance producers can reasonably protect themselves from liability by disclosing, at an early stage of a transaction, what they will do for a consumer and what they will not do. Smart, ethical agents and brokers do not allow the public to guess as to whether or not they represent the insurer or the insured. They document this disclosure, as well as every other act and discussion they have with a consumer, be it about a person�s wants or needs, policy exclusions, the financial stability of an insurer or any other matter.
In a perfect world, the producer would and could act in the best interests of everyone, including the consumer and the insurer. That, though, can be a difficult goal to attain, particularly when a person is confronted with the daily grind of doing business, with the emphasis on profits and the reality that producers need to earn a living. But even for those producers who struggle with this approach due to the pressures of making money and staying out of legal trouble, there are serious incentives to behaving ethically.
Adherence to ethics improves public relations, which can only help business. Such adherence should also lessen a producer�s legal concerns in a time when few agents and brokers are absolutely certain of their court-imposed duties. The more people feel as if they have been treated fairly, the less likely they are to take legal action against someone. And even in those situations in which litigation becomes unavoidable, demonstrations of documented ethical conduct can be an insurance producer�s best defense.