The agency agreement between an insurer and an agent establishes a fiduciary relationship between the two parties. Arising out of this relationship is the agent's duty to act in the best interests of the insurer. Although this duty extends to every act in which the insurer's interest is at stake, we can develop a list of principles to use as a guide in our dealings with these companies.
Since so much of the agent's job involves the solicitation of insurance, it is a reasonable place to begin our discussion. In the solicitation of insurance, the ethical principle involved is an agent's duty to solicit business that will be profitable to the insurer. In more concrete terms, what that means to the agent is that his or her solicitation should be for business that is likely to result in a reasonable claims ratio. For the life insurance agent, that means selecting prospects who are in reasonably good health and who are in a position to pay both the initial premium and future premiums. Although insurers are unlikely to expect agents to act as home office underwriters, this requirement, nonetheless, places a burden of care on agents not to present unsuitable applicants to them.
Consistent with the solicitation of profitable business is another agent obligation to carry out authorized activities with reasonable care. An example of this principle is the requirement that we not attempt to engage in business in which we are not capable of performing with a level of skill possessed by others that are similarly engaged. In other words, if the practitioner is not familiar with the area, he or she should seek the assistance of another agent that is. That may involve working with your company's pension specialist, disability expert or someone else that has particular skill in the area.
What we disclose to our companies is the next ethical area we will deal with. The ethical principle involved is one that requires the agent to make a full disclosure to the insurer of all pertinent information that bears on the placement of an insurance policy. The agent that decides not to list an applicant's illness on an application because he or she felt it was not important may have violated this part of the fiduciary and ethical obligation. Not surprisingly, the important word is "pertinent." Unless the agent is certain that the information is not pertinent and is in a position to adequately judge its pertinence, the agent should not fail to note it on the application.
Another important but common situation involving an insurer that requires full disclosure is in the completion of claim forms. Claim form completion may be somewhat less of an issue in the case of a life insurance claim since health department regulations impose a certain standardization where death is involved. In the case of health insurance or property & casualty claims, however, it is extremely important.
An ethical issue that surfaces with some regularity relates to conflicts of interest. As agents of an insurer, life insurance agents have a duty to avoid conflicts of interest. The standard applied to an agent's actions with respect to this principle depends upon whether the agent is a captive agent or an independent agent. Not unexpectedly, a captive agent is held to a higher ethical standard in this regard than an independent agent. We can see an example of that differing standard in the products sold. Although an independent agent may represent multiple companies, each offering identical products that compete with one another, a captive agent's representing the same companies would constitute a breach of fiduciary duty.
An ethical issue that we considered briefly in relation to the agent-prospect interaction has to do with the implementation phase of the sales process. The agent is required to follow through on business transactions within a reasonable time. However, the definition of a "reasonable time" is fluid and often seems to depend more on the courts than on the facts of the situation.
For example, a court held a property & casualty insurance agent liable for not obtaining coverage only two days after commencing the search for it, while another held that three weeks was a reasonable time to spend searching for coverage. In the case of life insurance or health insurance, an insurer may be placed at risk if an insurance application is not submitted on a timely basis. In such cases, the controlling ethical principle is that applications should be completed and business submitted within the earliest possible period of time. Applications and premiums for life and health insurance should be submitted within one business day of being taken, while applications for property & casualty insurance should be submitted within one business day of locating the market.
A fiduciary duty with which agents are generally familiar is the duty to account for premiums. Premiums must be submitted on a timely basis, must not be commingled with personal funds and must not be used for personal expenses. If the agent banks the applicant's premiums, he or she must be sure to maintain a separate bank account for that purpose. Failing to maintain a separate bank account for applicants' premiums inherently suggests impropriety.
Considerably broader in scope than the duties that we have considered thus far, the final fiduciary duties are duties of loyalty and obedience to the represented insurer. In plain terms, agents owe a legal and ethical duty of loyalty to their represented insurers. Loyalty to our insurers manifests itself in our acting in good faith and with integrity in our dealings with them.
Agents also have an obligation to follow their carriers' lawful and reasonable instructions. Because of the litigious environment, especially where the deep pockets of insurance companies are concerned, this obligation is of particular importance. Partly in reaction to the legal environment, many insurers are providing thorough instructions regarding the solicitation of business and the type of illustrations that agents can use.
Instructions like these are designed both to limit the insurer's liability and provide a minimum standard against which agent conduct may be measured. Agents that choose to ignore the instructions from their insurers may find their contracts terminated, and, if sued, they may be required to face the lawsuit entirely on our own. Clearly, the agent that disobeys his or her carrier's compliance requirements does so at considerable risk.