Introduction to Unauthorized Entities

The sale of insurance by unlicensed entities poses a grave danger to the public.   These entities and contracts are not subject to the safeguards built into state insurance laws.  "Policies" issued by unauthorized "insurers" are not required to maintain adequate reserves to pay policyholder claims.   In many cases,  operators of these "unauthorized entities" embezzle the premium payments -- and when claims begin to mount, the house of cards simply collapses. Moreover, since the "insurers" were unlicensed, their policies are not covered by the state guarantee fund.   So policyholders are left holding the bag -- liable for expenses they thought would be reimbursed.   This usually ruins their personal credit and has profound impacts on other aspects of their lives.  In the case of phony health insurance, coverage by "unauthorized entities" means that duped policyholders do not have "continuous credible coverage" -- a typical requirement for obtaining new group coverage.  Even if "policyholders" don't suffer financial ruin due to unpaid claims, they may find it difficult or impossible to obtain new coverage once the scam is discovered.

 The sale of phony insurance usually occurs when the insurance market is tight.  When legitimate insurance is difficult to obtain, the insurance-buying public is susceptible to dishonest operators marketing coverage offered by unauthorized entities.  In many cases, the promoters of these plans operate in the shadows of the regulatory structure.   The patchwork, federal/state nature of insurance regulations works to their advantage:  by claiming federal jurisdiction, they avoid state regulation -- and by claiming to be insurance products (which are primarily regulated by state law), they avoid federal oversight.    

To combat the sale of phony insurance, the Florida legislature recently passed laws to stiffen the penalties applied to those found guilty of operating an unauthorized insurance entity and those agents who sell phony policies.  In addition, the new law requires all insurance pre-licensing and continuing education courses to cover the topic of unauthorized entities.  These efforts are designed to make agents aware of the scope of the problem and the methods that unscrupulous operators use when offering phony insurance.  Lastly, the Department of Financial Services created a new Unauthorized Entities Section within the Division of Insurance Fraud to investigate and enforce the laws against the sale of bogus coverage.

This chapter addresses a number of areas agent must consider to exercise due diligence of the products they offer:  The previous chapter provided a general outline of federal and state regulatory framework -- this chapter will examine detailed state and federal laws governing insurance, the type of scams used by dishonest promoters, the penalties agents face for selling bogus insurance.