Fiduciary Responsibility

A "contract of agency" establishes a fiduciary relationship between an insurer and an agent.  One central tenet of this contract is the agent's duty to act in the best interests of the insurer.  This duty extends through all actions the agent takes in which the insurer's interest is at stake, especially proper handling of premiums, solicitation of business, full disclosure of pertinent facts related to applicants, following insurer directives and exercising due care in their dealings.  

 The most obvious fiduciary duty -- one with which agents are generally familiar -- is the duty to account for premiums.  Premiums must not be commingled with personal funds nor may they be used (in legal jargon, "converted") for personal expenses.  Agents who do so are guilty of "embezzlement" -- a criminal offense ranging from a misdemeanor if the amount is $300 or less, to a felony, if more.     If the agent deposits the applicant's premiums in a bank account, the agent should be sure to maintain a separate bank account for that purpose to avoid the appearance of impropriety.  (If the agent collects premiums on behalf of an insurer for which the agent is not appointed (most likely, excess or rejected business), the funds must be held in a separate account).  Florida law requires that agents maintain records of premium payments for at least three years.  Lastly, premiums accepted by the agent must be submitted to the insurer on a timely basis.

In the solicitation of insurance, the agent has an ethical and fiduciary responsibility to solicit business that will be profitable to the insurer.  Agents should focus their solicitation efforts on 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.

Agents must be sure to make a full disclosure to the insurer of all pertinent information that bears on the placement of an insurance policy.  The agent report, attached as part of the application should note, the agent's pertinent first-hand observations and knowledge of the insured (for example, did the applicant smoke cigarettes while answering "nonsmoker on the application).  The important word is in these statements 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.   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.  

Likewise, agents who assist policyholders in submitting claims forms must keep the insurer's best interest in mind.   Again, full disclosure of pertinent facts is required.  Claim form completion may be somewhat less of an issue in the case of a life insurance claim since a death certificate must accompany the claim form -- although there may be discrepancies in the insured's true age, which may have a bearing on the level of the policy's coverage (less common are cases of impersonation, lack of insurable interest or intent to murder which could void the policy.)  In the case of health insurance or property & casualty insurance claims administration is extremely important, as there is the possibility of multiple claims under a single policy.    Filing false applications or claims forms is considered "fraud" under Florida law; a felony.    

As was mentioned earlier,  one ethical issue that arises in implementation phase of the sales process is following through on business transactions within a reasonable time.  The definition of a "reasonable time" is ultimately left to the courts based on the facts of the situation.    Some courts have 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, 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 an insurer willing to accept the application.  The standard boilerplate in most contracts reads: "Time is of the essence" -- agents should realize that such language exists for a reason.

Another fiduciary duty is that 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 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.  

Along similar lines, an agent has an 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 agent 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.  

Lastly, agents frequently face 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.