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The term fiduciary describes both the responsibility inherent in handling another person's financial affairs, and the individual who holds such responsibility. Insurance licensees commonly act as a conduit, receiving and transferring funds from client to insurer, and, eventually, from insurer to client. Any person who diverts or appropriates fiduciary funds to their own use is guilty of theft and punishable for theft as provided by law.
If a licensee fails, within a reasonable time after demand, to pay any premium, return premium, or other fiduciary fund which the licensee holds, the Commissioner may order the licensee to pay a penalty not exceeding 3 times the amount wrongfully withheld, in addition to requiring the licensee to pay the premium and return premiums received by the producer and unpaid to the person entitled to those funds.
An ethical producer should be able to identify and apply the meaning of the following:
The California Insurance Code and the California Code of Regulations identify many unethical and/or illegal practices, but it is impossible to write legislation for every possible unethical act — an agent's ethical obligation goes beyond what is expressly codified.
An agent's role in the insurance industry is one of great responsibility toward others. The Insurance Code articulates in many different ways the legal and ethical aspects of the client-agent relationship. Fiduciary responsibilities are very high on the list — the contact an agent has with the money or premiums of insureds, or the advice and recommendations given to others, has implications for their money or financial security.
An insurance agent must practice and demonstrate the highest level of ethics, integrity, and morals. Failures or lapses in any of these areas can result in great financial harm to others. Misrepresentation, twisting, concealment, diverting client money to personal use, and other moral issues are prohibited in various ways by the Code. Failing to answer, or giving an intentional wrong answer to questions that insureds or prospects ask, is also an ethical problem, because it can lead a client to make a choice that might not be in their best interest. Unethical conduct can lead to suspension or loss of license, monetary penalties, and even time in jail or prison.
Agents must make recommendations to clients based on the clients' best interests. For an agent to recommend products or services to a person that the agent would not recommend for himself or herself in the same circumstances is an ethical dilemma often described as a conflict of interest. The normal conduct of business, especially in the insurance industry, can present agents with many opportunities for conflicts of interest.
Agents are typically paid on a commission basis. Commissions are usually calculated on the basis of annual premium submitted, even though the client may have paid just the first monthly installment with their application. For an agent, the higher the premium collected, the higher their commission check. If the higher premium, and the higher commission, is the result of an inappropriate recommendation for the client, that is a conflict of interest and an unethical act.
The opportunity an agent may have to represent multiple insurers can be in the best interest of the client, but it can also lead to conflicts of interest, especially if a decision to place business with a particular company is made on the basis of which company is offering the best "perk" to its agents. Incentives such as commission bonuses, trips or cruises, computers, or other sales-based contests all present opportunities to do what's right for the agent, but not what's right for the client.
Ethics demands that the other person and their family are of primary importance. An agent who demonstrates the highest respect for others will have the most successful career. Agents who neglect this respect for others may have success initially, but they rarely have long-term success. The responsibility for ethical behavior is squarely on the agent.
Seniors are among the least likely to report financial crimes or abuses against them, because they might be embarrassed at having "been taken," or because they do not wish to appear to be losing the ability to manage their lives or personal finances.
Unethical agents have been caught selling multiple, duplicative policies to seniors; proposing one type of insurance policy or annuity contract but delivering another (bait and switch); and misleading senior consumers into believing that an annuity product is actually a long-term care contract (or vice-versa).
The California Insurance Code has established rules and regulations for insurers, brokers, and agents who engage in insurance transactions with individuals who are 65 years of age or older. All insurers, agents, and brokers who solicit insurance to insureds age 65 or older owe those insureds a duty of honesty, good faith, and fair dealing.
Any advertisement or other device designed to produce leads based on a response from a potential insured, that is directed toward persons 65 years of age or older, must prominently disclose that an agent may contact the applicant. In addition, an agent who makes contact with a person as a result of acquiring that person's name from a lead-generating device must disclose that fact in the initial contact with the person.
An insurance broker or agent may not participate in, be associated with, or employ any party that participates in, or is associated with, the origination of a reverse mortgage, unless the insurance agent or broker maintains procedural safeguards designed to ensure that the agent or broker transacting insurance has no direct financial incentive to refer the policyholder or prospective policyholder to a reverse mortgage lender. Individuals transacting insurance may not receive compensation, commission, or direct incentive for providing reverse mortgage borrowers with a noncasualty insurance product connected to, or a result of, the reverse mortgage. An agent or broker may still offer title insurance, hazard, flood, or other peril insurance, or other similar products that are customary and normal under a reverse mortgage loan.
Insurance agents or brokers similarly may not participate in, be associated with, or employ any party that participates in, or is associated with, obtaining veterans benefits for a senior, unless procedural safeguards are in place to ensure that the agent or broker transacting insurance has no direct financial incentive to refer the policyholder, or prospective policyholder, to any veterans benefits program offered through the government.
Unless an agent is licensed as an attorney, the agent is prohibited from delivering to a person age 65 or older a living trust or other legal document, other than an insurance contract or other insurance product document, if a purpose of the delivery is to sell an insurance product. It is also prohibited for any insurance agent who is licensed as an attorney to deliver to a person age 65 or older a living trust or other legal document, other than an insurance contract or other insurance product document, unless the insurance agent complies with the disclosure requirements for attorneys who provide financial services.
All group life insurance policies offered for sale to individuals age 65 or older in California must provide an examination period of 30 days after the receipt of the policy for purposes of review of the contract. If the policyholder chooses to cancel the policy and returns it for cancellation, by mail or other delivery method, within the 30-day examination period, the policy will be void from the beginning, and the policyholder will be entitled to a full return of policy premium (no later than within 30 days of the policy return).
Finally, a person who meets with a senior in the senior's home regarding the sale of life insurance or annuity products is required to deliver a notice in writing to the senior no less than 24 hours and no more than 14 days prior to that individual's initial meeting in the senior's home. If the senior has an existing insurance relationship with an agent and requests a meeting with the agent in the senior's home the same day, a notice must be delivered to the senior prior to the meeting. The notice must be a stand-alone document, with the appropriate information inserted and without any attachments. It must be written in 16-point bold type, and include all of the relevant information, such as the agent's full name, license number, mailing address and telephone number, as well as the required disclosure for the purpose of the visit.