Unlike the issues that have been examined thus far that were unethical largely because of the situations in which they occurred, we are now going to examine practices that are illegal and unethical in all cases, irrespective of the situation. The unethical practices that we will consider are:
Twisting & Churning
Abuse of the Free-Look provision, and
Twisting is the act of replacing insurance coverage of one insurer with that of another based on misrepresenations. Churning is in effect "twisting" of policies by an existing insurer. While replacement of existing coverage is a perfectly legitimate practice, inducing changes in coverage based on misrepresentation or deception is unethical and illegal.
"Churning" has a second connotation, that of "overtrading." Churning is the practice of excessive trading in a client's securities account for the primary purpose of generating commissions for the practitioner. The practice holds no benefit for the client and is forbidden. There are no established standards for determining when excessive trading is being done. However, the practitioner needs to be guided by the client's interest with respect to his objectives and financial situation.
In more straightforward terms, it means that when the practitioner is making trades with the intention of generating commissions rather than improving the client's situation he or she is guilty of churning. Furthermore, since mutual funds are long-term investments, when substantial trading is being done in a client's mutual funds the likelihood is great that the practitioner is churning.
Another practice that is unethical -- and which is illegal in most states -- is rebating. While the giving of gifts to customers takes place in many industries, this practice is generally forbidden in the insurance business. Rebating involves the giving or promising of a valuable consideration intended to be an inducement to the buyer to purchase an insurance policy. The inducement may be cash or any other item of value. Generally, any gift greater than a nominal one could be considered a valuable consideration and a violation of rebating rules. For Florida rules on rebating.
Another practice that is considered unethical is the lack of full disclosure of specific policyowner rights. One of those important rights has to do with what is known as the "Free Look" provision. The Free-Look period is a cooling off period after the purchase of a life insurance policy that gives the applicant an opportunity to recover his initial premium for any reason -- or for no reason. An unethical practice involving this provision is the abuse of the Free-Look rules. The agent's failure to advise the policyowner of his or her rights under the free look provision or to explain the details of the provision constitute unethical behavior.
One of the substantial problems that has seemed to plague the insurance industry is misrepresentation.
The misrepresentation may be either oral or written and is the basis of many of the legal problems the industry has encountered. Although in most cases misrepresentations appear to happen unintentionally -- the misrepresenting agents believing that they are being truthful -- the agent's ignorance is not a defense against liability arising out of this unintentional misrepresentation. The existing laws that hold agents responsible for misrepresentation are generally based on the premise that agents have an ethical duty to know what they are selling and to present policies in a truthful manner.
SPECIFIC FLORIDA LAWS AND RULES
Agents and companies may, for advertising purposes, provide applicants with gifts valued up to $25. Department rules define gifts as "articles of merchandise". The Department does not recognize gift certificates, memberships or other services as "merchandise". Consequently, agents who give away auto club memberships, gift certificates or cash violate the Insurance Code. Rule 4-150.
Rebating -- returning a portion of a commission as an inducement to apply for insurance -- is permitted in Florida in very limited circumstances under Florida Statute 626.572:
(1) No agent shall rebate any portion of his or her commission except as follows:
(a) The rebate shall be available to all insureds in the same actuarial class.
(b) The rebate shall be in accordance with a rebating schedule filed by the agent with the insurer issuing the policy to which the rebate applies.
(c) The rebating schedule shall be uniformly applied in that all insureds who purchase the same policy through the agent for the same amount of insurance receive the same percentage rebate.
(d) Rebates shall not be given to an insured with respect to a policy purchased from an insurer that prohibits its agents from rebating commissions.
(e) The rebate schedule is prominently displayed in public view in the agent's place of doing business and a copy is available to insureds on request at no charge.
(f) The age, sex, place of residence, race, nationality, ethnic origin, marital status, or occupation of the insured or location of the risk is not utilized in determining the percentage of the rebate or whether a rebate is available.
(2) The agent shall maintain a copy of all rebate schedules for the most recent 5 years and their effective dates.
(3) No rebate shall be withheld or limited in amount based on factors which are unfairly discriminatory.
(4) No rebate shall be given which is not reflected on the rebate schedule.
(5) No rebate shall be refused or granted based upon the purchase or failure of the insured or applicant to purchase collateral business.
The Free Look provision in Florida is a minimum of 10 days for all forms of life insurance. For most health policies issued in Florida, the Free Look provision is 10 days -- with two notable exceptions: Medicare Supplement (Medigap) and Long Term Care policies. In both of these cases, the Free Look provision is 30 days. Insurers may extend these timeframes for their policies, but may not shorten them.