Clients want to know: How Are You Qualified to Sell Insurance? Agent Requirements. Be Licensed

Transcription

1 Clients want to know: How Are You Qualified to Sell Insurance? After reading this, you should understand: Your unique qualifications to sell life insurance Expectations others will have of you as a life insurance agent Agent Requirements In order to meet the legal requirements and to provide the sales and service that clients expect, agents must: Be licensed; Enter into an agency contract; Practise the highest standards of conduct; Acquire errors-and-omissions (E&O) insurance. Be Licensed Provincial Superintendents of Insurance issue licences to applicants upon the following: Successful completion of a qualification exam set by the Superintendent (this is the exam that concludes the LLQP course of study); Satisfactory evidence that the applicant is of good character and reputation, and has a reasonable educational background and a good record if previously employed; Receipt of a written application, with the fee. Sponsorship by a Life Insurance Company for the first two years. Licences permit agents to sell specific products. They are issued as: A life insurance licence, which permits sales of life insurance; segregated funds; annuities; and/or accident and sickness insurance; or An accident and sickness insurance licence. + FILE See file 1 for a write-up on license terms and renewal, revocation and suspension. Copyright 2011 Oliver Publishing Inc. All rights reserved. 15

2 LLQP Agency contract The agency contract permits the agent to negotiate contracts with third parties on behalf of the principal the insurer. Enter into an Agency Contract The agency contract is the contract between the agent and the insurer or insurers whose policies the agent will sell. The insurer is called the principal in the agency contract. The agency contract spells out instructions to the agent from the principal and describes how the agent is compensated. When the agency contract comes into force between the agent and principal, the agent is then able to negotiate insurance contracts with third parties (customers) on behalf of the principal. The agency contract defines the relationship between the principal the insurer and the agent. This arrangement, in which the agent acts on behalf of the insurance company, is called the law of agency. The law of agency authorizes an agent to bind the insurance company (the principal) with a third party (the insured). Actual authority When the principal instructs the agent to perform specified tasks, those actions are performed by virtue of the agent s actual authority. Apparent authority When certain tasks must be performed that do not fall within the agent s actual authority, then the agent acts with apparent authority. The agency contract gives agents the authority they need to do their job. This authority takes two forms: actual authority and apparent authority. Actual authority is what the principal has instructed an agent to do. It is straightforward: an agent is given authority to perform certain tasks. They are generally limited to: Soliciting insurance applications; Collecting the initial premium; Delivering the policy. Actual authority also defines the tasks that the agent is prevented from performing. Apparent authority exists when the principal implies or suggests that the agent has been authorized to do certain tasks. It is a grey area that is not defined by specific activities and yet applies to many jobs undertaken by agents. Agency contracts are drafted in such a manner as to limit the agent s apparent authority, because apparent authority can be a source of problems. When the agent acts with apparent authority, the agent may accidentally or intentionally create a 16 Copyright 2011 Oliver Publishing Inc. All rights reserved.

3 Qualifications misconception in the mind of the client that the principal has approved of what the agent is doing. This may not be the case. However, when a client does not know the limitations on an agent s authority, the principal will be bound by the agent s apparent authority, not their actual authority. Mitchell has been a client of the MGA Insurance Agency for 23 years. His long-time friend and agent, Fred, has just retired, and Mitchell s new agent is Rich. Rich, a licensed life agent, sent Mitchell a quarterly newsletter during the first year of their relationship, and then phoned Mitchell to tell him about a new type of health insurance policy being introduced by one of the large life insurers. Mitchell was impressed and proceeded to buy a policy for himself and his wife. What authority did Rich have to act as he did with Mitchell? A B C D Apparent authority Actual authority Agency authority Due diligence The Rights and Obligations in an Agency Relationship An agency relationship exists among all the parties to an insurance contract the agent, the insurance company (principal), and the client (third party). Each of these parties has rights and obligations to each other. The insurer s obligations to the agents with which they have agency contracts are to: Pay the agent the agreed-upon commission for selling the product(s); and Repay the agent for all expenses incurred in the performance of his or her duties, unless they are independent brokers or agents. Agent Must follow professional standards for conduct with principal or principals, colleagues, and clients. Insurer Must follow all regulatory requirements plus honour commitments to agents and clients. Client Must not misrepresent any information to the agent or insurer. Copyright 2011 Oliver Publishing Inc. All rights reserved. 17

4 LLQP As long as the agent follows the instructions of the insurer, he or she will not be held responsible for any damages that may occur in carrying out duties. If, however, the agent fails to carry out the instructions of the insurer, the agent may be liable for damages that result. Also, the insurer is entitled to repayment by the agent for a loss that results from the agent wilfully exceeding authority or from agent negligence. The insurer is responsible to clients for the authorized acts of its agents and for unauthorized acts committed within the scope and course of authorized services. When a client has suffered a loss due to agent wrongdoing, the insurer may claim that its agent acted without actual or apparent authority, and that the company did not approve any unauthorized actions. If this is shown to be true, the client can sue the agent directly. To avoid being put in this position, the agent should always make clear to the client that he or she is acting as an agent, and identify the insurer. If an agent does not have the actual or apparent authority to bind the company to the client, the insurer can grant this authority retroactively if certain conditions are met. It is not just agents and insurers who can be held liable in the agency relationship. The client will be liable for loss if he or she intentionally defrauds the insurer in the application. It is unlikely that the insurer or the agent will sue a client for damages. However, clients can expect their claims to be denied if information that they provided on the application that formed the basis for the policy was misleading. Finally, any form of fraud by any of the parties in the relationship will immediately and irrevocably terminate a contract. You will learn about the degrees of mistakes made by agents and clients and more about fraud in the section about applying for insurance. Ethical conduct The measure of a life insurance agent s business character and his or her adherence to the codes of ethics established by CLHIA. Practice the Highest Standards of Conduct The ethics of a life insurance agent determines his or her conduct. Ethical conduct means that you must conduct yourself in a manner that fosters a positive reputation for yourself, your agency, those insurers whom you represent, and for the insurance industry as a whole. 18 Copyright 2011 Oliver Publishing Inc. All rights reserved.

5 Qualifications Ethical conduct is based on the principles of: Knowing the client; Demonstrating fiduciary responsibility; Respecting privacy and confidentiality; Following professional standards. Knowing the Client Securities regulators require their members to obey the Know Your Client (KYC) rule. They do this by completing a Know Your Client form, also known as a New Client Application Form (NCAF), with the client before a transaction occurs. While insurance agents do not yet have an equivalent form, they are required by their Code of Ethics to follow the Know Your Client rule. It is important to know your client so you can judge whether your client is making a suitable purchase. Suitability applies both to the type of product and the coverage it provides. In order to know your client and assess suitability, you must: Understand the initial need that brought the client to consider life insurance; Monitor the client s needs; Document the relationship. The initial need will be based on insuring against the three predictable risks: financial loss resulting from death, disability, or old age. You must match the right product to the risk facing the client and ensure adequate coverage has been determined. Your client may not agree with your recommendations for policy type or coverage; that is their privilege. Your job, however, is to provide the correct information, according to your knowledge and expertise. Knowing your client will mean that you find out when he has bought a small business. Not only will such a step affect his personal coverage, but it also gives the agent the chance to introduce business insurance. Copyright 2011 Oliver Publishing Inc. All rights reserved. 19

6 LLQP Monitoring your client s needs is, as we have seen, part of post-sale service. You should make periodic reviews that take into account any change in your client s financial situation. We spoke earlier of changes such as a marriage, separation, or divorce or a change in financial obligations, such as a new mortgage or a paid-off mortgage, which will have an impact on a client s need. Other changes of which you will need to be aware will include a change in employment, receipt of an inheritance or other windfall, and impending retirement. Ethical behaviour practices that you will employ as an agent include: Delivering the policy to your client in a manner that reinforces the value of the insurance purchased; Premium follow-up to remind your client when the premiums are due; Policy-owner service, in which you maintain contact with your client on an ongoing basis. Documentation of your relationship (that is, keeping accurate records) with your client is essential. Keeping accurate records of all of your business dealings with Due diligence Due diligence is the process by which a prudent person examines and evaluates the risks of a business transaction. It usually applies to one with a fiduciary duty. your clients, including any services provided by others, is considered part of due diligence. The purpose of documentation is to provide you with a record of the reasoning behind a decision, long after that thinking may have been forgotten. It will be invaluable in case your client becomes dissatisfied. Documentation will protect you and your insurer in the event that your client questions your advice or conduct, or takes legal action against you. In this case, you must be able to reconstruct the details of your interactions with your client from a comprehensive electronic or paper trail, and to demonstrate due diligence. An agent should keep a record of all of the following for each client: Conversations; Meeting agendas; Instructions received verbally or in writing from the client; Information given to the client; Instructions and information given to third parties about the client; Electronic communications, such as ; All transactions; Checklists; Correspondence. 20 Copyright 2011 Oliver Publishing Inc. All rights reserved.

7 Qualifications If the actions, advice, or conduct of an agent is questioned by a client, it is essential for the agent to be able to: A B C D Immediately inform his or her employer, so that a lawyer can mediate between the client and agent Terminate his or her relationship with the client immediately Access the details of interactions with the client from an accurate and comprehensive record of business dealings Inform the client of the Code of Ethics and his or her personal liability for any loss Fiduciary Responsibility A life insurance agent is a fiduciary. Fiduciaries have a special relationship with their clients that is based on confidentiality and trust. If your behaviour as an agent is called into question, it will be measured against the high standards expected of fiduciaries. The fiduciary relationship between a life insurance agent and a client exists because: Fiduciary A fiduciary is someone who has a responsibility of confidentiality and trust for another. Lawyers, doctors, and bankers are also fiduciaries. A client depends on the information supplied by a life insurance agent; The client places confidence in you and expects you to act for his or her benefit; Affairs of the client must be kept confidential at all times; A life insurance agent is bound by professional standards including ethics; A life insurance agent has a duty to advise fully, honestly, with care, skill, and in good faith; and A life insurance agent must keep meticulous records of all undertakings on behalf of the client. As a life agent, you have a fiduciary duty to: A B C D Put the best interest of the beneficiary first Put the best interest of the life insured first Put the best interest of the policy owner first Put the best interest of the insurer first Respect Privacy and Confidentiality Personal information collected from clients is very sensitive and highly confidential. It is both ethical and legally required for the agent to protect and use such information properly. There are two types of personal information you will collect: one deals with financial matters and is a measure of whether the policy premiums are affordable for the client. The other centres on the health history of the individual and his or her ancestors. Although personal information is usually collected directly from clients, it may also be obtained from third-party sources, including lawyers, accountants, or doctors with a client s authorization. Copyright 2011 Oliver Publishing Inc. All rights reserved. 21

8 LLQP If the client agrees, you can ask his or her lawyer for information about the client, and the lawyer will be able to provide the information. Personal information is protected in all of Canada via the federal Personal Information Protection and Electronic Documents Act (PIPEDA), or its provincial equivalent. Legislation ensures that, if written consent of the client has not been given to release information to other people or organizations, such information will only be used for the purpose for which it was supplied. The national guidelines of the Canadian Life and Health Insurance Association (CLHIA) state that personal information should be provided to others only: If the individual gives his or her consent; If disclosure is required by law; If the information is reasonably necessary to determine eligibility; To protect the insurer against fraud or misrepresentation; If the information is disclosed in the discharge of a public duty. Agents are forbidden to use any client-related confidential information for their benefit or the benefit of a third person, or to the disadvantage of the client. Guidelines pertaining to privacy rights stipulate that personal information: A B C D Should not be disclosed without consent of the individual Should be disclosed if required by law Should not be disclosed to third parties under any circumstance A and B 22 Copyright 2011 Oliver Publishing Inc. All rights reserved.

9 Qualifications Follow Professional Standards When agents act with proper care and exercise fiduciary duty, they will be on their way to a satisfied and growing client base. However, agents must also be very sensitive to those activities in which they can be judged guilty of misconduct. These activities include: Holding Out Provincial and federal legislation and regulations, as well as guidelines from federal and provincial associations, play a significant role in governing how life insurance agents in Canada can be held out in other words, how an agent presents himself or herself to the general public. You must understand the limits put on what you can and must disclosure to a client or potential client in the province in which you practise. Disclosure is usually required for: The name, in writing, of the insurer(s) the agent represents or the insurer who will be issuing the policy; The commission the agent will receive from the insurer for placing the policy (the amount of the commission does not have to be disclosed); The names of all insurers and other financial-service suppliers that are represented by the agent for new, renewal, or replacement policies; Information on how to cancel a policy, how to redeem or surrender a policy prematurely, and the cost for a policy with a cash surrender value. For example, the Canadian Life and Health Insurance Association (CLHIA) guidelines provide that, before the buyer signs an application for a life insurance policy (other than a variable policy), he or she can receive, on request, a copy of the CLHIA Guide to Buying Life Insurance and a policy financial summary. An agent can be satisfied that he or she is properly holding out when regulations and policies for disclosure are followed. Commission Commission is the amount paid to the agent by the insurer for his or her sales. It is a percentage of the value of the sale, typically heavily weighted towards payment in the early stages of a policy. Replacement Replacement occurs when a life insurance policy or part of a policy is replaced by another policy. Surrender Surrender occurs when a policy is willingly terminated by the policy owner and any cash value in the policy is received. Cash surrender value When a policy that has a cash value is surrendered, the cash surrender value is the amount of money to be received by the policy owner. Would you buy insurance from this man? The impression created by this shadylooking character goes to the issues of professionalism and holding out. Copyright 2011 Oliver Publishing Inc. All rights reserved. 23

10 LLQP Tied Selling Tied selling occurs when a financial institution requires the client to transact additional business with the institution as a condition of doing business. For example, if a financial institution required a client to buy life insurance as a condition of receiving a personal loan, that institution would be guilty of tied selling. Tied selling is prohibited. Misrepresentation Agents who misrepresent the benefits of a policy or investment returns during a sale will be subject to sanctions and restrictions. These sanctions include fines, the requirement to cease and desist or perform remedial action, as ordered by the Superintendent of Insurance, limitations on the agent s licence, or the loss of the licence. If an agent misrepresents information, any loss suffered by clients as a result of that misrepresentation could be their responsibility. If a lawsuit is initiated, the litigation process permits the transaction between the insurer, you, as the agent, and your client to be examined in detail. Your conduct must hold up to a detailed inspection. In addition, the federal Competition Act makes it a criminal offence if you use an advertisement to promote a product or service that contains false or misleading statements or representations to the public. You must refer to your provincial insurance act or your provincial insurance council to understand prohibitions relating to advertising. Nationally, the Code of Ethics for agents stipulates that members must not use advertisements that refer to their sales results or their membership in some club or organization that is based on sales volume. This prevents advertising yourself as a leading agent. However, life underwriters can indicate on letterhead, business cards, and announcements that they have achieved Million-Dollar Round Table status. What you say in a seminar can be deemed misrepresentation if those statements are acted upon and the client experiences negative consequences as a result. 24 Copyright 2011 Oliver Publishing Inc. All rights reserved.

11 Qualifications Ted Johns is an agent with the Wellness and Benefits Insurance Co. His client, Mary, has a policy with W&B. When the policy expires, Ted renews Mary for another year. The policy is renewed five times. In the fifth year, Ted presents Mary with the option of converting the policy to a five-year policy and mentions that the savings can be directed into an investment fund, also available through W&B, that will earn a 14% rate of return based on its five-year history of performance. Is Ted showing any breaches of the rules of professionalism in his conduct with Mary? A B C D Yes, he is guilty of replacement and tied selling. Yes, he is guilty of misrepresentation. Yes, he is guilty of churning and replacement. No, his behaviour is above reproach. Commission Splitting In most provinces, licensed life insurance agents can share commissions only with other licensed agents. Rebating, a form of sharing commissions, has recently been allowed in some Western provinces. An agent can pay a third party a finder s fee for providing prospects or leads, but the fee paid must be a fixed amount per prospect or lead. The fee cannot depend on the commission. In addition, an agent can pay a consulting fee of a given amount per case (or per hour of consultation) for services rendered. Again, the fee cannot be based on commissions, unless the consultant is also a licensed life agent. Replacement Replacement is a term used to describe the act of surrendering an insurance policy or part of the coverage of an insurance policy in order to buy another policy. The code of ethics for life insurance agents prohibits agents from engaging in unfair and deceptive practices, including engaging in the indiscriminate replacement of life insurance contracts, or adopting as a sales strategy, any plan involving the indiscriminate replacement of life insurance contracts. Replacement is perfectly valid as long as the replacement is in the client s best interests and the new policy has not been misrepresented or an incomplete comparison has not been made between policies. This is accomplished, in part, by providing the client with a standard disclosure statement that compares all the features of the existing policy with those of the proposed replacement policy. Clients will then be able to properly compare the premiums, coverage, and tax implications. The disclosure statement, when signed by the client, must be sent to the insurer of the existing policy within three business days. Copyright 2011 Oliver Publishing Inc. All rights reserved. 25

12 LLQP Churning A policy is churned when it is replaced only to generate a new commission for the agent from the existing insurer. Twisting Twisting occurs when the policy is replaced with a new insurer and a commission generated. Lapse A policy is said to lapse when the policy owner fails to make a scheduled premium payment and the policy becomes void. Contract provisions Contract provisions are the terms and conditions of the life insurance contract. Some provisions, like the suicide and incontestable provisions, are designed to protect the interests of the policy owner because these clauses commit the insurer to paying the face amount of the policy after the policy has been in force for two years. + FILE See file 2 for case studies on suicide exclusion and incontestability contract provisions. Laws aimed at controlling replacement of life insurance policies are designed to prohibit churning and twisting. Churning occurs when the agent seeks to replace an in-force policy with an existing insurance company with a new policy from the same company, primarily for the purpose of generating a new commission. Twisting occurs when an agent induces a policyholder to surrender or lapse a policy with one insurer and replace it with another insurer, to the detriment of the policyholder. When thinking of replacing a policy it is essential the client knows that: The new contract will attract new first-year charges and, consequently, may have reduced surrender values for several years; Suicide and incontestable contract provisions begin anew. This means that, if death occurs by suicide in the first two years of the new policy, the face amount will not be paid to the beneficiary. Also, the contract becomes contestable during this two-year period if a mistake is found in the policy application; The prospect will be older than when the original policy was taken out, and health may be declining, so premiums will be higher; Loan and other guarantees available on older policies may not be available on contemporary products. Some jurisdictions state that the replacement rules do not apply when: The new life insurance contract is made with an insurance company with which the applicant has an existing life insurance contract; The contract being replaced is an annuity; Group insurance replaces an individual contract or an individual contract replaces group insurance; The contract replaces creditor insurance. Know the rules that apply in your jurisdiction. Be prepared to show a complete comparison between the existing policy and the new policy when replacement is being considered. 26 Copyright 2011 Oliver Publishing Inc. All rights reserved.

13 Qualifications Whenever you and your client have deemed that replacement is appropriate, the insurer of the new policy must issue the new policy as soon as possible once the application has been accepted, in order to prevent any gaps in coverage when the old policy is surrendered or has lapsed. If an insured wants to cancel an existing policy before the new policy is issued, and consequently will lack coverage for a period, it is recommended that the replacing agent documents this request by confirming the intention of the insured in writing. What is the difference between lapsing a policy and surrendering a policy? A B C D Lapsing a policy occurs only when it is being replaced. A policy is surrendered when the life insured has a conflict of interest. Lapsing a policy occurs when the agent pays the premium. A policy lapses when premiums are not paid; when a policy is surrendered, its cash value is received by the policy owner. Conflicts of Interest A conflict of interest is an interest that would likely have an adverse affect on your judgment, advice, or loyalty to a client or prospective client. As the insurance agent, you must disclose all actual or potential conflicts of interest relating to an insurance transaction or your recommendations to a prospective life insurance buyer. Unfair Trade Practices Unfair trade practices are the use of coercion, undue influence, premium rebating, and gifting to clients. Any action of the agent that could sway the independent judgement of the client in respect of acquiring or keeping a policy is prohibited. An agent must not use coercion or undue influence, to obtain insurance business. The distinguishing line between coercion and undue influence is tenuous. Coercion is the practice of forcing another party to behave in an involuntary manner by use of threats or intimidation. Coercion may involve actual infliction of physical/injury or psychological harm in order to enhance the credibility of the threat. For example, a food inspector may threaten a restaurant owner with fines and closure of his restaurant for infractions. The inspector may then tell the restaurant owner that he could let him get away with only fines, if he purchases a life insurance policy from him, as he is also a life insurance agent. This is coercion. Undue influence involves one person taking advantage of a position of power over another person. For example, the owner of a corporation may inform his employees that he is an agent and ask them to purchase life insurance policies. In this situation, there is no actual threat in the event a policy is not purchased from Copyright 2011 Oliver Publishing Inc. All rights reserved. 27

14 LLQP him, but it does not allow an employee to act of his own free will for fear of retaliation from his superior. Agents are prohibited from threatening to start any legal action against a person if this threat is intended to stop the person from making a complaint against the agent under provincial legislation or association bylaws. Most provinces prohibit premium rebating when an agent offers to pay part of the policy premium on behalf of the client. Premium rebating may also involve a gift, promotion, or inducement to individuals to encourage them to make an application for insurance. Gifts of nominal value, such as calendars or pens, are permitted, as long as such gifts do not hinge on the recipient buying life insurance. A gift of tickets for a cruise from an agent to a client would be evidence of an unfair trade practice. Protect Yourself with Errors-and-Omissions Insurance Insurance agents and carriers are vulnerable to lawsuits from clients claiming that mistakes have been made. Within the insurance industry, this type of professional liability is covered by errors-and-omissions (E&O) insurance and is provided specifically by E&O insurance carriers. E&O insurance for life insurance agents is not optional; it is mandatory that all agents have coverage. E&O insurance ensures that an agent or insurer will be protected against settlements that can potentially be very large. In addition, consumers can be satisfied that a claim or claims against an agent or insurer will be made good. Most provincial regulations specify the minimum amount of coverage that an agent must carry. Also, most provinces require an agent to carry coverage for fraud. The process for a client making a claim begins with an accusation by the client that the agent or insurer made an error or omission. When an agent is accused, it is usually on the basis of: Misrepresentation of coverage; Improper instruction in a claim; Failure to secure coverage; Failure to secure proper coverage; 28 Copyright 2011 Oliver Publishing Inc. All rights reserved.

15 Qualifications An error in calculation; Mishandling of funds; Failure to act in a timely manner. The agent or insurer then puts the E&O carrier on notice of the claim. At this point, the E&O insurance carrier steps into the shoes of the party against whom the claim has been made. The E&O carrier investigates the claim and deals directly with the claimant to settle or litigate the claim on behalf of the agent or company being sued. I spoke with my client Judith in May when she instructed me to replace her term policy with a universal life policy and increase her coverage from $500,000 to $1 million. I started the process but, due to the death of my husband, the policy replacement was overlooked. When I got the application back on track, Judith said she had been diagnosed with pancreatic cancer and has two months to live. She is going to sue me for the $1 million in coverage she requested. Fortunately, my E&O policy will provide Judith with the coverage she rightfully deserves, even though the fault was mine. Attention to detail at the time of sale and delivery of the policy will go a long way to minimize the likelihood of an errors-and-omissions claim against an agent. The details of all contacts, whether in person, by telephone, , or any other means should be documented. Consistent failure to do so may result in discrepancies between the agent and client that could provide the basis for a court decision against the agent. An agent must not oversell the policy, nor fail to point out policy exclusions. He or she must take care when explaining when coverage begins. As we will see, great care must be exercised to ensure that the insurance application has been fully and accurately completed, and reviewed with the client. When changes are made to the application, the agent should ensure that the changes are acknowledged and initialled by the applicant. Copyright 2011 Oliver Publishing Inc. All rights reserved. 29

16 LLQP Most jurisdictions provide protection against insurance-agent fraud through their errors-and-omissions insurance requirements. In Ontario, for instance, in addition to the required $2-million aggregate coverage for errors and omissions, every agent must also have extended coverage for fraudulent acts. E&O insurance protects: A B C D Consumers Agents Consumers and agents Consumers, agents, and insurers 30 Copyright 2011 Oliver Publishing Inc. All rights reserved.