Replacement, Twisting & Churning
Replacement is defined as changes in existing coverage, usually with coverage from one insurer being "replaced" with coverage from another. Because a commission is payable when an existing policy is replaced with another, replacement can lead to ethical lapses. Agents should be aware that replacement of coverage can, in some cases, be inappropriate and therefore unethical. That said, it can also be argued that failure to replace coverage that no longer meets the client's current needs may be just as unethical. Because of the problems arising from unethical sales practices, state law imposes restrictions and additional duties on agents who seek to replace coverage.
In Florida, replacement is defined as a purchase of new coverage accompanied by a substantial reduction in the benefits available under an existing policy. Agents should ask about existing coverage and note possible replacements on the application. This is a minimal standard of conduct. To be ethical, the agent must also provide a complete and accurate disclosure of the proposed replacement. To do less, would be unethical. A complete comparison requires that the consequences of any replacement be made clear to the policyholder.
For example, a homeowner currently has windstorm coverage from Company A. As a result of a certified home inspection a number of years ago, the homeowner qualifies for reduced premiums with Company A. The agent proposes changing the coverage to Company B, a more financially sound company, for approximately the same premium cost. At first glance, this appears to be a reasonable recommendation. But the agent should also disclose that the homeowner’s property will probably have to be re-inspected, at an additional out-of-pocket cost, to qualify for the discounted premium rate from the new insurer. There is also the possibility that Company B’s premium discounts may not materialize if the re-inspection finds new vulnerabilities in the property.
Twisting is the act of replacing insurance coverage of one insurer with that of another based on misrepresentations. ( Another activity, 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.
Premiums paid by clients must reflect the cost of the underlying insurance policy that they have purchased. It is illegal for agents to charge clients more (or less) than the premium rate filed with the Office of Insurance Regulation. Adding fees for ancillary services or coverages that are not disclosed to the policyholder is a violation of Florida law known as “sliding”. For example, an agent when presenting automobile insurance might also offer clients membership in an auto club or prepaid legal services. It is acceptable to do so, but any costs or fees for the “add-ons” must be disclosed and kept separate from the auto insurance coverage. Otherwise, the agent is guilty of “sliding”.
Rebating & Gifts
While giving gifts to customers is customary in many industries, this practice can lead to ethical problems. For this reason, gift-giving or rebating 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 possible violation of rebating rules.
In Florida, any rebates must be uniformly offered to all prospects in the same actuarial class -- that is to say, the agent may not "pick and choose" which clients will be offered the rebates. If offered, the size of the rebate must also be uniform among those receiving the rebate — again, no "picking and choosing", although the rebate schedule may allow for differences between policies of different sizes or members of different actuarial classes, so long as factors such as race, age, sex, marital status, residence, or occupation are not used to distinguish the classes. Nor may agents require clients to purchase other ("collateral") products in order to obtain the rebate. Agents who choose to rebate must prominently display their rebating schedules at their place of business and make copies of the schedule available to members of the public. Such schedules must be retained for five years.
Agents must file a copy of the rebating schedule with the carrier prior to offering rebates on policies issued by that carrier. All rebates given to customers must be consistent with the schedule that is filed with the insurer. Insurers may deny an agent permission to offer rebates -- and most do. If an insurer prohibits rebating on policies it underwrites, the agent may not rebate any portion of his or her commission earned from that company.
Gifts of nominal value are permitted under Florida law, with some restrictions. Agents and companies may, for advertising purposes, provide applicants with gifts valued up to $25. Rules of the Department of Financial Services 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 cards or cash violate the Insurance Code.