Marketplace & Regulation
Florida law requires any individual who solicits insurance products, including annuities (fixed and/or variable) to hold a valid license issued by the Department of Financial Services. Once properly licensed, the individual also must be appointed by an insurance or annuity company to transact insurance on behalf of that company. A licensed agent is prohibited from transacting any kind of insurance (e.g., life, health, annuities, etc.) for which he or she is not properly appointed. An individual may not be appointed until that individual has been licensed for the same kind of insurance. In short, an agent must simultaneously hold a license from the state and an appointment from an insurance company to solicit or transact insurance. One is not effective without the other.
Brokers vs. Agents
Brokers, unlike agents, legally represent the annuity purchaser (or prospective purchasers). A broker solicits and accepts applications for insurance and then places the coverage with an insurer. The business is not in force and the insurance company is not bound until it accepts the application. Technically speaking, a broker does not represent anyone until prospect or client requests coverage — then the broker represents the buyer.
This distinction between agent and broker becomes blurred in the annuity market when independent (unaffiliated) agents are appointed by various companies to sell their products. In many cases, a client will wish to purchase an annuity and the agent will show proposals from several different companies. Is the sales person an agent representing the company's products, or broker representing the client's needs? In practice, the regulatory distinction between brokers and agents is not significant, as Florida does not issue separate licenses for brokers. Instead, licensed agents may act as brokers for their clients. There is, however, an important legal distinction: brokers owe their ultimate fiduciary responsibility to their clients; agents owe a fiduciary responsibility to the company that appoints them. Since a company can only pay commissions to appointed agents, a broker legally owes a fiduciary responsibility to both his clients and the annuity company. Ethical agents will strive to behave as fiduciaries for their clients, too. These conflicting interests can sometimes place an agent or broker in a difficult position.
Many persons, not just insurance agents and brokers, act as fiduciaries. By definition, a fiduciary is a person in a position of financial trust. Attorneys, accountants, trust officers, pension plan trustees, stockbrokers and insurance agents are all considered fiduciaries. As mentioned above, agents and brokers may owe a fiduciary duty to both to the companies they represent and to the insurance buying public. Agents who make recommendations to clients have an obligation to be knowledgeable about the features and provisions of various insurance policies, as well as the prudent the use of these insurance contracts. Agents also must take the time to become acquainted with the client's financial needs, situation and objectives. Agents collect premiums on behalf of the insurers they represent. The agent has a fiduciary duty to make certain that these premiums are submitted to the insurer promptly. Agents must take care that these funds are not converted to one's own personal use or that company funds are commingled with the agent’s personal funds. .
Insurance agents and brokers (and other fiduciaries) voluntarily accept this fiduciary responsibility and implicitly agree to carry out that duty in good faith. That has been interpreted by the courts to mean that fiduciaries must act reasonably to avoid negligence and to not favor anyone else's interest (including their own) over that of their clients or the companies that appointed them. While each profession may have its own definition of fiduciary responsibility, all agree on some basic tenets. Fiduciaries owe their principals:
Utmost Care. One standard applied to fiduciaries is the "prudent man rule", which states that the fiduciary should behave as a "prudent person" would under the same circumstances. This can be a very vague standard, but it is one that courts have relied on over the years. Professionals are usually held to a higher standard of conduct — to exercise "utmost care". This higher standard is warranted because professionals are assumed to be more knowledgeable and experienced than an ordinary prudent person. One can argue that clients seek out and are willing to pay for professional advice precisely because of the added knowledge and experience the professional brings to the decision-making process — and therefore should be held to that higher standard.
Integrity — this applies to the fiduciary's soundness of moral principle and character: the agent must act with fidelity to the principal's interest and with complete honesty.
Honesty and Duty of Full Disclosure of all material facts, either known, within the knowledge of or reasonably discoverable by the agent which could influence in any way the principal's decisions, actions or willingness to enter into a transaction.
Loyalty — An obligation to refrain from acquiring any interest adverse to that of a principal without full and complete disclosure of all material facts and obtaining the principal's informed consent. This precludes the agent from personally benefiting from secret profits, competing with the principal or obtaining an advantage from the agency for personal benefit of any kind.
Duty of Good Faith — includes total truthfulness, absolute integrity and total fidelity to the principal's interest. The duty of good faith prohibits taking advantage of the principal through the slightest misrepresentation, concealment, threat or adverse pressure of any kind.
In the case of conflicting interests, the agent must disclose the "dual agency" (acting for two parties at the same time) or risk being accused of fraud from either or both principals. Most brokers are compensated by commissions. This in itself creates a difficulty since there is an inherent conflict of interest. It is common knowledge to most insurance purchasers that agents and brokers earn a sales commission, which may mitigate the conflict somewhat. (That obviously does not excuse a broker for churning or twisting a client's coverage to earn additional commissions.)
The Florida courts addressed this commonly held knowledge in the case of Beardmore v. Abbott. Mr. Beardmore purchased an annuity through his broker, Mr. Abbott. Later, Mr. Beardmore let the contract lapse by not paying a required premium. Mr. Beardmore sued, claiming that his broker had not disclosed the amount of commission paid on the sale, and therefore Mr. Abbott breached his fiduciary responsibility. The courts ruled that Mr. Abbott did indeed have a fiduciary responsibility to Mr. Beardmore, but the broker's failure to disclose the full amount of his commission did not breach that duty (the court also found that the annuity purchase was suitable for Mr. Beardmore's needs). In this case, Mr. Beardmore did not inquire as to the size of the commission at the time of the purchase, and Mr. Abbott did not volunteer the information. If Mr. Beardmore had asked that question, presumably the courts would have ruled that Mr. Abbott must honestly disclose that information as a matter of fiduciary trust. It should be noted that Mr. Beardmore was very familiar with the insurance market, and knew that Mr. Abbott would receive a commission — it was disclosure of the exact amount that was the crux in this case. Agents should, at least, make clients aware that they may receive a commission as part of an insurance/annuity transaction. [It might also behoove agents to note that Florida law requires companies to use licensed agents to deliver policies in Florida and pay the "customary" commission to those agents (i.e., that there is no cost savings to the customer by purchasing the product through another agent or purchasing directly from the company).]
The fiduciary duty of insurance brokers was also addressed in another case: Moss v Appel. The Appels were a self-employed couple who hired Moss, a pension benefits consultant, to help them set up a defined benefit plan. Mr. Moss sold them an annuity as part of that plan and was hired to handle administrative paperwork for the pension plan. Mr. Moss received notice from the annuity company that it was in seeking additional capital to remain in business, but he did not alert the clients to that notice. The annuity company later became insolvent. The courts ruled that Mr. Moss, the broker, owed a fiduciary responsibility to his clients based on the sale of the annuity and the ongoing consulting/administrative contract. As the court noted: "It is undisputed that Moss was acting as an insurance broker, not an insurance agent employed by a particular company, when he sold the plaintiffs the annuity." Presumably that distinction means that Mr. Moss should have placed the client's interests above any duty he may have felt to keep the contract in force with the troubled annuity company (even if it was the company that compensated him for the sale). In this case, there was a contract with the clients to administer the plan. The court did not indicate how that continuing relationship might have affected its ruling — or for how long after the annuity sale Mr. Moss (in the absence of a continuing relationship) owed that duty to the Appels. These cases illustrate some of the problems that can arise for insurance brokers. As noted earlier, annuities are more likely to be "shopped around", which increases the likelihood that the sales person will be viewed as a broker, and not as an agent.
The Florida Insurance Code requires anyone “transacting insurance” within Florida to have a Florida-issued license: a resident license for agents who reside in Florida or non-resident license for those living in other states and transacting business in Florida. The licensing law makes no distinction between agents and brokers. One of the major roles of an insurance agent is to solicit insurance. Florida law defines “solicitation of insurance” as:
“any attempt to persuade any person to purchase an insurance product by: describing the benefits or terms of insurance coverage, including premiums or rates of return; distributing an invitation to contract to prospective purchasers; making general or specific recommendations as to insurance products; completing orders or applications for insurance products; or comparing insurance products, advising as to insurance matters, or interpreting policies or coverages.
Please note: under Florida law "insurance products" include annuities of all types — fixed, indexed and variable.
Unlicensed clerical personnel in insurance agencies may service a contractholder’s account, answer clerical questions, assist contractholders with paperwork, etc. – provided they do so under the supervision of a licensed agent and are not paid based on sales commissions. Unlicensed personnel should not give advice, compare contract features, or initiate contact with clients.
Variable Annuity Licenses
Persons selling variable contracts (variable annuities, variable life, variable universal life) are subject to dual regulation -- state regulation as an insurance agent and federal regulation as a securities representative. At the federal level, this means passing the Financial Industry Regulatory Authority's (FINRA's) General Representative (Series 7) or Limited Representative (Series 6) examination. At the state level, these salespersons must hold a Florida Variable Annuity license. A variable annuity license does not exist by itself – a variable annuity license is valid only if the agent also holds a life insurance agent license. Recently-licensed life agents will be licensed for both life and variable annuities. Life agents who were licensed prior to 1990 did not automatically obtain the variable annuity license. For these agents, there is a separate variable annuity examination.
Agents who are licensed a particular line of insurance must also be appointed for that same line. If they remain unappointed for a line of insurance for 48 months, their license will lapse.
For example, if you become licensed for life, health and variable annuity (2-15) license, but only are appointed for the lines of life and health, then your qualification as variable annuity agent will expire in 48 months (if there is no appointment within that time) and you will have to take the variable annuity portion of the exam again.
It is important to note that equity indexed annuities are currently treated as fixed annuities for regulatory purposes. The SEC has proposed that EIAs be subject to the same regulations as variable annuities. This proposal has been met with opposition from the National Association of Insurance Commissioners and companies that issue equity indexed annuities. Under current regulations, agents selling EIAs must be life-licensed (and appointed) — no other license is required.
Florida statutes do not permit an individual to hold an insurance agent's license if that person does not hold himself or herself out to the general public as an insurance agent but instead uses the license principally for soliciting, negotiating or procuring controlled business.
Controlled business means insurance contracts covering the agent and or members of his or her family; officers, directors, stockholders, partners or employees of a business in which he or she or a member of his or her family is engaged; or the debtors of a firm, association or corporation of which the agent is an officer, director, stockholder, partner or employee. The underlying premise is that the agent may exercise undue influence over the purchasing decisions of these people.
Agents are permitted to write contracts for clients who are considered controlled business provided that the agent writes other similar business at least equal to the amount of controlled business written within a 12-month period. Failure to write an offsetting amount of noncontrolled business can result in revocation of the agent's license.
Ongoing agent requirements
In Florida, an agent's license does not have an expiration or renewal date – it may remain in force perpetually. An agent's license terminates if he or she allows four years to elapse without being appointed for each class of insurance listed on the license. (Appointments are discussed below.) And of course, the Department may suspend or revoke an agent’s license for violations of the Insurance Code or Department rules.
Florida law requires an agent to notify the Department of Financial Services in writing, within 60 days, of any changes to his or her name, residence address, business street address, mailing address, phone numbers or email address. Change of name/address forms are available on the Department website.
Under Florida law any agent who has been found guilty (or plead guilty or no lo contendere ("no contest")) to a felony or a crime punishable by imprisonment of 1 year or more must notify the Department in writing within 30 days. This requirement applies whether the crime occurred in Florida or elsewhere; regardless of whether the crime was a violation of state or federal law. The requirement also applies without regard to whether a judgment of conviction has been entered by the court or adjudication was withheld. The agent must also notify the Department of comparable violations of foreign laws.
To maintain a life or health license, agents must complete at least 24 credits of continuing education every two years in courses approved by the Department. The rules provide exceptions for persons with certain professional designations (CLUs, ChCFs, etc.). Agents licensed less than six years may earn credit in courses rated basic, intermediate or advanced. Those who have been licensed for a period of six or more years must complete only 20 credits every two years, but these credits must be in intermediate or advanced level courses. Each agent must complete, as part of his or her required number of continuing education credits every two years, a minimum of three credits of continuing education on the subject of ethics approved by the Department. Life-licensed agents must also complete three credits on the subject of suitability — which can also be used to meet the ethics requirement. This course qualifies for that suitability requirement.
An agent’s continuing education compliance period is based on his or her birth date. The first compliance period ends on the last day of the agent’s birth month following two years of licensure — subsequent periods end every two years thereafter.
For example, Dawn Day passed her licensing exam on March 15, 2010. Her birthday is September 13th. Her first compliance period will end on September 30, 2012 and future compliance periods will end September 30h of every odd-numbered year thereafter.
Agents will not be able to renew their appointments, reinstate old ones or obtain new ones, if they are out of compliance with the continuing education requirements. All agents are strongly advised to maintain current continuing education and to consult the Florida continuing education law for specific requirements and exceptions.