CE- Claims Adjuster Academy

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Individual states are more responsive to the needs of their own citizens. Although state regulations do differ from state-to-state, most follow the guidelines set out for all state governments and their respective insurance commissions (Texas Department of Insurance [TDI], 2021i). As such, the differences between the state regulations are minor in detail. There may be great upset caused to individuals if a switch over from the state-governed system to a federally governed system was to ensue.

UNIT 1 Insurance and Ethical Responsibility - 5

Chapter 1 – Regulations Part 1.1:

Why Regulate?

The Purpose of Regulation

State regulations governing the insurance industry are designed primarily to (a) protect the consumer from abuses and (b) promote fair competition among the insurers. Not all consumer abuses are the direct result of fraud or willful intent. In many cases, increased competition drives a business environment to move too quickly, and incompetence results. So, the regulations also include guidelines for how an insurance practice should be operated to maintain a minimum standard of competence (TDI, 2021i). The state regulates practices in the insurance industry in these speci fi c areas (www.tdi.texas.gov): • Financial condition of the insurer (TDI, 2021f) • Licensing (TDI, 2021a) • Rates (TDI, 2021f) • Standard provisions in contracts (TDI, 2021h) An insurer’s financial stability is of great importance, as its financial strength shows how viable the company is, and it shows a proven track record of performance and service to its customers. All insurance companies must meet basic requirements to continue to do business. For example, insurers are required to keep reserves of funds to be used to pay future claims. These funds are earmarked for future use and cannot be part of the assets of the company (TDI, 2021f). Handling assets is also regulated. Most states do not allow insurers to invest in risky investment vehicles, such as certain types of securities. Instead, the insurers are required to invest in conservative financial vehicles. Insurers are also required to report their financial condition to the state annually. The state systematically audits each insurer on a regular basis. Financial Condition of the Insurer

Regulating Insurance

Until 1944, insurance was not considered as commerce and as such was not subject to federal authority. Each state regulated policy language and rates. However, the States v. the South-Eastern Underwriter Association, a landmark case in 1944, forced a reversal in the insurance industry; the Supreme Court ruled that insurance was indeed commerce and subject to federal authority. By that time, each state had already implemented programs and policies for governing insurance on the state level, and leaders of the federal government were reluctant to step in and take over the process.


Licensing relates to the power of the insurance department to do the following (TDI, 2021a): • Issue licenses • Renew licenses

• Suspend licenses • Revoke licenses

In 1945, Congress passed the McCarran-Ferguson Act, which turned over control of the insurance industry to the state, rather than the federal, authorities. The federal government would only

Both individuals and insurance companies must be licensed to participate in the insurance industry in a state. Companies must have a license to do business in the state. Agents must hold a valid license to sell insurance in the state, and many states now require insurance adjusters to be licensed. Licensing regulations (a) ensure that the state insurance department can maintain the standards it has set for individuals and companies alike, and (b) allows the department to have an avenue for removal of any individuals or companies from the state insurance industry if they are found to violate the regulations. In this way, the insurance department can stop fraud, consumer abuse, and remove individuals who are unscrupulous or unethical in their dealings within the insurance industry.

intervene in insurance matters if a state’s governing regulations were proved to be

inadequate. Today, the role of the state is still to oversee the insurance industry. From time to time, state regulations are challenged by supporters of a

federally controlled system. Supporters of federal regulation of the insurance industry point to a level of overall uniformity that could be achieved by bringing all the regulations under one governing body, instead of 50 individual bodies. Supporters of the state-regulated industry counter this thinking with the following arguments:


Investigative Consumer Report

The amount each consumer pays for his or her insurance policy is known as the insurance rate and competition among insurance companies to provide the lowest rates to consumer’s fuels the marketplace. The insurance department in the state governs

An investigative consumer report compiles more

information than a typical consumer report. Data were gathered from interviews with neighbors, friends, business associates, and so on. The report includes information on the consumer’s habits, general reputation, character, and lifestyle (Fair Credit Reporting Act, 1972, Sec. 1681a).

how the rates are determined and applied, and it further outlines that insurance companies must provide their rate structure to the insurance department for review and compliance with all state regulations (TDI, 2021g).

There are speci fi c areas where rates must be scrutinized. The state stipulates that rates must NOT be, as follows:

By law, the consumer must be informed within 3 days that a report has been requested. The consumer must also be noti fi ed that he or she has the right to request additional information. The person or entity requesting the report must provide a full and accurate disclosure to the consumer about the contents of the report within 5 days of receipt of the report, or when the report was fi rst requested, whichever is later.

Excessive : Rates may not be too high, and consumers may not be overcharged for insurance.

Inadequate : Although consumer concerns are considered, insurance companies must be able to charge a high enough rate to cover the insurance company’s losses and exposures. Discriminatory : The main issue of discrimination in insurance rates relates to the assumption of parties of risk. It does not mean that all consumers should pay the same amount for insurance. The very nature of the business indicates that certain factors, such as age, sex, and physical status, determine lower or higher rates. However, rates cannot discriminate in that certain members of one group cannot be charged a higher rate to subsidize lower rates for other members of the same group.

Prohibited Information

Not everything can be included in a consumer report. Most adverse information older than 7 years cannot be included (Fair Credit Reporting Act, 1972, Sec. 1681c), as well as these: • Bankruptcies over 14 years old • Suits and judgments over 7 years old • Paid tax liens over 7 years old • Accounts placed in collection or “charged off” over 7 years old • Arrests, indictments, or Conviction of Crime Reports

Standard Provisions in Contracts

Consumer Rights

To establish a small measure of uniformity, many states require standard provisions in contracts, or may have a standard policy format that is to be followed (TDI, 2021h). Terms that are used and de fi ned will be the same from provision to provision, to further ensure uniformity. Many states have “readability standards” that require that policies, provisions, and contracts be worded in the most simple, easy to understand terms.

If a consumer report contains information an individual believes is inaccurate, he or she has the right to request a reinvestigation to update the fi le (Consumer Financial Protection Bureau, 2015).

Individual Rights

Applicants have the right to know the kinds of information gathered, and to correct any inaccurate information. Applicants also have the right to be made aware of why they were turned down for insurance if that is the case (Ammerman, 2013).

Consumer Credit Report

A consumer report is issued solely to those who have a legitimate business need for information on an individual’s credit history, payment history on loans, and so forth (Investopedia, 2021). When an individual applies for a line of credit, or applies for an apartment, a consumer report will be requested by the creditor or the property owner. Some employers now request consumer reports as well. Though consumer reports are usually requested when one applies for a loan, they are not used for policy loans, which are the loans life insurance policy owners can take (Kagan, 2020d). This is because with a policy loan, the insurer is simply advancing money to the policyholder that will accumulate later on in the policy’s term.

The Right Stuff


In addition to maintaining personal ethical standards, there is a responsibility on the agent to be as well informed as possible about the products and advice he or she presents to the consumer. The agent must do the following: • Understand how each product works. • Analyze the needs of the consumer and make proper recommendations. • Motivate people to take action. • Understand how insurance companies work.

Chapter 2 –The Insurance Professional Role Part 2.1: The Insurance Professional Ethics are Number One Priority

• Know how to support the policyholder. • Understand contractual obligations.

The work of an insurance professional plays an important, though sometimes unrecognized, role (Texas Administrative Code, 2021a). The insurance professional is part of the insurance industry’s public relations team. The agent meets the public every day, and the way an agent conducts his or her business leaves a lasting impression, relating to the entire insurance industry.

Changes in situations, rules, regulations, and products make it critical for an agent to keep on top of his or her profession. This is a career that demands constant study, awareness, and dedication, all of which result in success.

Cutting down the Competition

A Code of Conduct

Insurance agents must maintain a level of professionalism in their attitudes toward their competitors (Texas Administrative Code, 2021a). An agent must avoid criticizing other agents; it harms the competitor, puts the critical agent in a bad light, and leaves a bad impression of the insurance industry in general with the prospective client. If unchecked, misleading, or harmful criticism of another in the industry may lead to revocation of the license of the agent who is guilty.

While not a “hard and fast” list of rules, the following may serve as guidelines for ethical conduct (National Alliance for Insurance Education & Research, 2011): • Place the interests of the customers fi rst. • Strive for a high level of personal integrity. • Strive to constantly improve your professional skills and knowledge in the industry. • Maintain a professional level of conduct with business associates and others in the insurance industry. • Make it your personal responsibility to know the laws and rules that regulate the insurance business and follow them in both the spirit and letter of the law. Even the best-intentioned agent may sometimes fi nd himself or herself exposed to risk or liability related to a mistake he or she has made. No one is perfect; if a mistake is made an agent must assume responsibility for it and make every effort to rectify the situation (Franken fi eld, 2021). There are a few ways that an insurance professional may protect himself from liability exposure: • Be aware of the applicable laws and insurance regulations and follow them. • Be aware of company standards and procedures. • Perform activities such as needs analysis, policy delivery, service to the policy owner, claims investigations, and the like with extreme care and due diligence. • Keep the lines of communication open between customers and the company and respond quickly to their needs. • Take measures to continuously improve knowledge and skills in the fi eld. There are a few areas that are regular pitfalls for agents; areas where an agent is most likely to encounter problems with errors and omissions liability (Franken fi eld, 2021) . These are as follows: Liability

Lofty Goals

A professional in the insurance industry must set lofty goals and adhere to a set of high personal ethical standards, as well as comply with the minimum legal standards established by the state (Texas Administrative Code, 2021a). These minimum legal standards create safeguards to protect the consumer, but professionalism requires more than just meeting these standards—it means exceeding these standards. An insurance professional achieves this goal by putting his or her clients’ interests ahead of his or her own.

Trust is the Key to Success as an Agent

Maintaining high ethical standards is bene fi cial for the client and the agent (Texas Administrative Code, 2021a). Put simply, people like to do business with people they trust. An agent who maintains high standards is going to have more success in business than the agent who does not maintain those same high standards. Genuine respect and concern for the client motivates the professional agent to act ethically. Agents who are tempted by an individual or fi nd themselves in a situation in which they are pressured to act in an unethical matter must consider the long-term results of those actions, and the result it may have on the agent’s career.

Making a Difference

Just why that element of trust is crucial to an insurance agent’s professional role is evidenced by the services an agent performs (Texas Administrative Code, 2021a). Consider some of the following areas where an insurance agent serves the client: An insurance agent may provide the fi nancial planning tools that enable a child to go to college by assisting his or her parents with trusts, or life insurance.

• Failing to obtain the correct coverage for a client. • Failing to obtain adequate coverage for a client. • Failing to maintain coverage for a client.

Insurance agents clearly present an essential service today (Texas Administrative Code, 2021a).

Potential legal liability for errors and omissions is just one of the reasons an agent must strive to maintain high ethical and professional standards.

comparison of the new policy and the policy to be replaced. The comparison must at least include the following: • Renewability of the two policies. • Pre-existing conditions that affect coverage in the two policies. • Bene fi ts provided by the two policies.


Part 2.2: The Insurance Agent Types of Agents



Agent and Insurer Responsibilities

Solicitation and Advertising

Certain lines of insurance require speci fi c duties on an agent and an insurer when it comes to sales and marketing of its product (Bonner, 2020). Individual health insurance is an example of one of these lines. Though it may not be as common of a product as individual life insurance, individual health insurance is still a viable product sold by agents in the United States. As with all other things, “insurance” agents must follow certain state requirements, which may vary from state to state. The purpose of these requirements is to protect applicants and policyholders and to ensure agents and insurers are being treated fairly and ethically. Since most of these requirements are technically laws, they fall more under “legal behavior” than “ethical behavior,” but that does not mean understanding and following them is not as important as being ethical. Here is a brief and general description of these requirements. Be sure to check with the laws in your own state as well (https://statutes.capitol.texas.gov/?link=IN).

There are things an agent cannot do when soliciting or advertising an individual accident and health policy. For instance, it is unethical for an agent to convince an applicant to over-insure, omit pertinent underwriting information, and to sell a policy to someone the agent knows is eligible to receive Medicaid.

Disclosure of Information

An agent must make an applicant aware of the Insurance Information and Privacy Protection Act (National Association of Insurance Commissioners, 1992), which will be covered in detail later in the course. This Act is similar to the Fair Credit Reporting Act (1971) , which will also be discussed.

Modi fi cations to the Application

An agent cannot make changes to an applicant’s application, even if he or she knows the answer provided by the applicant is a mistake. If an agent makes a change to an application without the applicant’s knowledge and initialing, the entire policy could be contested. If a mistake is made by the agent while helping the applicant complete the application, the best thing he or she can do is void it and start another application. Other Agent and Insurer Responsibilities Individual health insurance is not the only product that comes with speci fi c requirements. Medicare supplements (TDI, 2021e) and life insurance (TDI, d also require special care and due diligence. Be sure to check with your state’s requirements if you have any questions about your responsibilities.

Duplication of Insurance Form

In the sale of an individual accident and health policy that duplicates other coverage, a Duplication of Insurance Form is used (Texas Administrative Code, 1999). The form must be signed by the policyholder, submitted to the insurer and kept on fi le, be a separate document, and be executed at the time of the application.

Written Comparison

If the individual accident and health policy being presented will replace an existing policy, the agent must provide the applicant with a written

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