Regulations -1

Up to this point, the concepts that you have covered have been ones that apply to the insurance industry as a whole. Now that you have examined insurance policies and their provisions, you can turn your attention to regulations and definitions that apply only to this state. You'll learn about a variety of topics, from the duties of the Department of Financial Services to licensing laws. This chapter is full of definitions and numbers for time limits and dollar amounts. Make sure that you know them for your exam.

TERMS TO KNOW

Cease and desist — to stop or discontinue Coercion — forceful act or threat aimed to influence a person to act against his or her will Commission — payment to the agent by the insurance company for placing insurance, usually a percentage of the policy premium Exempt — not subject to an obligation Immunity — exemption from a duty or legal obligation, or protection against a liability  Inducement — an offer that attempts to influence the other partyInsolvent — unable to meet financial obligations Moral turpitude — conduct that is contrary to community standards of justice, honesty or good morals Promulgate — to make public, to put into action (e.g. laws, court decrees, and similar)Statute — a formal written law enacted by legislature; insurance statutes can be found in the state Insurance CodeSuperintendent of Financial Services (Superintendent) — the head of the New York State Department of Financial Services

A. Licensing

Insurance professionals must be properly licensed for a specific line of authority in order to transact insurance. The purpose of licensing is to ensure that a producer meets educational and ethical standards required to fulfill producer's responsibilities to the insurer and to the public. Licensing regulations set out the requirements, procedures, and fees relating to the qualification, licensure, and appointment of insurance producers.

1. Definitions

Producer

Insurance producer means an insurance agent, title insurance agent, insurance broker, reinsurance intermediary, excess lines broker, or any other person required to be licensed under the laws of this state to sell, solicit or negotiate insurance.

Home State

Home state means any state, district, or territory of the United States in which an insurance producer maintains his/her principal place of residence orprincipal place of business, and is licensed to act as an insurance producer.

Negotiate

Negotiate (or negotiation) means the act of directly conferring with or offering advice to a purchaser or prospective purchaser of a particular insurance contract concerning any of the substantive benefits, terms or conditions of the contract, provided that the person engaged in that act either sells insurance or obtains insurance from licensed insurers, fraternal benefit societies or health maintenance organizations for purchasers.

Sell

Sell (or sale) means to exchange a contract of insurance by any means, for money or its equivalent, on behalf of a licensed insurer, fraternal benefit society or health maintenance organization.

Solicit

Solicit (or solicitation) means attempting to sell insurance or asking or urging a person to apply for a particular kind of insurance from a particular licensed insurer, fraternal benefit society or health maintenance organization.

2. Process

To qualify for an insurance license, an applicant must submit an application to the Superintendent and declare that all statements are true, accurate and complete to the best of the applicant's knowledge and belief. Additional requirements for a license applicant include

• Be a resident of the state of New York;
• Be at least 18 years of age;
• Submit a standard application for licensing on a form approved by the Superintendent;
• Fulfill the prelicensing education requirement of classroom work or equivalent in correspondence work or similar instruction (20 hours a single line of authority agent or broker, such as Life only agent or broker, 40 hours for a Life, Accident and Health agent or broker, Personal Lines agent or broker and Public Adjuster, and 90 hours for Property/Casualty agent or broker);
• Pay the applicable fees;
• Pass the applicable examination for each line of authority.

Licensing Examination Exemptions

A written examination is not required of the following individuals applying for an insurance agent's license: 

• Ticket-selling agent or representative (airline, bus, train or sea) for one-time issuance of baggage or accident insurance;
• Any individual whose license has been revoked or suspended (at the discretion of the Superintendent);
• In connection with any certificate of appointment for an additional insurer, as long as it is under the same line of authority already licensed;
• A nonresident licensee currently licensed in another state;
• An applicant who has passed the written examination for an insurance agent's license and was licensed, or an applicant who was licensed as an agent but did not pass the examination, provided the applicant applies within 2 years following the date of license termination;
• Any individual who was previously licensed for the same line of authority in another state (provided that the applicant's home state grants nonresident licenses to residents of New York on the same basis). Such individual will not be required to complete any prelicensing education. This exemption is only available if the application is received within 90 days of the date of cancellation of the applicant's previous license; 
• If applying for a life insurance, variable life and variable annuity products, or accident and health insurance license, or any other line of authority deemed to be similar by the Superintendent: 
  • An individual seeking to be a representative of a fraternal benefit society as its agent;
  • An applicant who is a Chartered Life Underwriter (CLU) or a Chartered Life Underwriter Associate (at the Superintendent's discretion);
• If applying for a property, casualty, personal lines or any other similar license: 
  • An applicant who has been granted the Chartered Property Casualty Underwriter (C.P.C.U.) designation by the American Institute for Property and Casualty Underwriters.

Refuse to Issue a License

The Superintendent may refuse to issue any insurance agent's or insurance broker's license if the proposed licensee is found to be not trustworthy and competent, or has not complied with any prerequisites.

Exemption from Licensing

An insurance producer license is not required of any officer, director or employee of an insurer or organizations employed by insurers, provided they are not directly or indirectly involved with the actual sale of an insurance contract and do not receive any commission.

Furthermore, the following individuals are NOT required to hold an insurance producer license:

• A director or employee of an insurer whose activities are limited to executive, administrative, managerial, or clerical;
• The director or employee of a special agent assisting insurance producers by providing technical advice and assistance to licensed insurance producers; 
• A person who secures and furnishes information for group insurance or performs administrative services related to mass-marketed property and casualty insurance; 
• An employer or association engaged in the administration or operation of a program of employee benefits for the employer's or association's own employees; 
• Employees of insurers or organizations engaging in the inspection, rating or classification of risks, or in the supervision of the training of insurance producers and who are not individually engaged in the sale of insurance; 
• A person whose activities are limited to advertising without the intent to solicit insurance; 
• A nonresident who sells, solicits or negotiates a contract of insurance for commercial property and casualty risks to an insured with risks located in more than one state insured under that contract; or
• A salaried full-time employee who counsels or advises his or her employer relative to the insurance interests of the employer or subsidiaries.

3. Types of Licensees

The following are the types of licenses that can be issued in the state of New York:

• Insurance agent;
• Insurance broker;
• Business entity;
• Consultant;
• Adjuster;
• Nonresident; 
• Temporary.

Agents

An insurance agent is a person authorized by an insurer, fraternal benefit society or health maintenance organization (HMO) to solicit, negotiate and obtain insurance, HMO or annuity contracts. The agent represents the insurer, not the insured.

The following are excluded from this definition:

• Any regular salaried officer or employee of an insurer, fraternal benefit society, or HMO who does not solicit or accept applications and does not receive a commission; and
• Any agent or representative of a fraternal, who devotes less than 50% of their time to the solicitation and procurement of insurance contracts and receives no commission.

Brokers

An insurance broker is any person, firm, association or corporation who solicits, negotiates or obtains insurance for an insured (other than him/herself) in exchange for a commission. A broker represents the insured, not the insurer, and acts in the best interest of the insured. The following are excluded from this definition:

• Any regular salaried employee of an insuredwhose duties are to counsel or advise his or her employer regarding insurance, but who does not receive any commissions or sell or solicit insurance.
• Any regular salaried employee of a licensed insurance broker who does not receive any commissions.

Consultants

Insurance consultants offer advice to the public about the benefits, advantages and disadvantages of insurance policies for a fee. The Superintendent may issue an insurance consultant's license to any person, firm, association or corporation who has complied with the following requirements:

• Submit a written application and pay a fee of $50 per year;
• Pass a written examination;
• Must be trustworthy and competent;
• Must not be an executive or an employee of or own any shares in the insurer he/she represents.

Adjusters

An independent adjuster is any person, firm, association or corporation, who, for a commission, acts on behalf of an insurer in the work of investigating and adjusting claims. An independent adjuster may not include any of the following:

• Officer, director or regular salaried employee of an insurer;
• Adjustment bureau or association owned by the insurers;
• Licensed agent of the insurer; or
• Attorney at law.

A public adjuster is any person, firm, association or corporation, who for a commission, acts on behalf of the insured in negotiating a settlement of a claim for loss or damage to property. The following are not considered public adjusters:

• Employee, agent, broker or other representative of any insurer who acts as an adjuster; or
• Attorney at law.

Public adjusters are required to complete 15 credit hours of continuing education every license renewal period (biennially). All adjusters must file a surety bond of $1,000 with the Superintendent before a license may be issued or renewed.

Nonresident

A nonresident insurance agent or nonresident insurance broker is an individual who is a resident of another state, who is licensed or authorized to act as an agent or broker in the state of New York. 

Applicants may qualify for a license as a nonresident only if he/she holds a similar license in another state or foreign country. Licenses issued to nonresidents by the Superintendent grant the same rights and privileges as resident licenses. This is called reciprocity. Nonresidents are not required to take a written examination.

If a person licensed in another state moves to New York and wants to become a resident agent or broker, he/she must apply for a license within 90 days of the cancellation of the applicant's previous license. As long as the licensee was in good standing at the time of cancellation, he or she may not have to fulfill prelicensing or examination requirements for lines of authority held in the previous state, unless the Superintendent determines otherwise.

Business Entities

A business entity is a corporation, association, partnership, limited liability company, limited liability partnership or other legal entity. Before any original insurance agent's or broker's license is issued, the prospective licensee must apply to the Superintendent. The application must contain information concerning the business entity. The licensee is responsible for the business entity's compliance with New York state insurance laws and regulations.

Temporary

A temporary license may only be used to service existing business, not to solicit, negotiate or procure new business. The Superintendent may issue a temporary license to an agent or broker or both without requiring an examination, in the following cases:

• To the surviving spouse, next of kin or court appointed personal representative of an agent who dies, or becomes mentally or physically disabled;
• To a member or employee of a business entity licensed as an insurance agent upon death, disability, or termination of a designated individual in the business entity; or
• To the designee of an agent entering active military service.

The temporary license may be issued for a term of not more than 90 days unless the Superintendent renews additional 90-day terms, not to exceed an aggregate of 15 months. In the case of military service, the temporary license may continue up to 60 days after the discharge from service.

4. Maintenance and Duration

Renewal

Producer licenses will remain in effect unless suspended or revoked, as long as they are properly renewed. Insurance agent's or broker's license must be renewed every 2 years. The licenses of insurance agents or brokers born in odd-numbered years will expire on their birthdays in odd-numbered years. The licenses of insurance agents or brokers born in even-numbered years will expire on their birthdays in even-numbered years.

An agent or a broker must file an application for renewal of license with the Superintendent at least 60 days before the license expires. If it is submitted late, the applicant will be subject to a late filing fee of $10.

The current license remains in effect until the Superintendent issues or denies the renewal license. Before a license can be denied, the Superintendent must notify the applicant of intentions to deny or nonrenew and give the applicant a hearing. If a renewal license is denied, the current license will expire 5 days after the licensee is notified.

Continuing Education

Continuing education (CE) rules are established to protect the public by maintaining high standards of professional competence in the insurance industry, and to maintain and improve the insurance skills and knowledge of licensed producers.

To renew a license, any resident or nonresident agent or broker must complete 15 hours of instruction by an approved provider of continuing education biennially (every 2 years). This continuing education requirement applies to agents and brokers licensed in life insurance and annuity contracts, sickness, accident and health insurance, all lines of property and casualty insurance.

Excess credit hours accumulated during any biennial licensing period cannot be carried over to the next period for the same class of license.

The course programs of instruction must be approved by the Superintendent. The providers must file for approval biennially. Each licensee must pay a fee of $10 per license for continuing education certificate filing and recording charges.

Assumed Names

Every licensee must notify the Superintendent upon changing of legal name. Except for an individual licensee's own legal name, licensees may not use any name unless it has been previously approved by the Superintendent.

Change of Address

The Department of Financial Services must be notified within 30 days of any change of address: residence, business or email.

Reporting of Actions

A licensee must report any administrative actiontaken against him or her in another jurisdiction or another state within 30 days of the final disposition of the matter. The report, filed with the Superintendent, must include a copy of any relevant legal documents.

Within 30 days of the initial pretrial hearing date, a licensee subject to this article must report to the Superintendent any criminal prosecution of the licensee taken in any jurisdiction. The report must include a copy of the initial complaint filed, the order resulting from the hearing, and any other relevant legal documents.

B. State Regulation

1. Superintendent's General Duties and Powers

The Superintendent of Financial Services (Superintendent) is appointed by the Governor, and continues in office until the end of the Governor's term. The Superintendent has very broad powers, both expressed and implied with the business of insurance, that extend to all financial service providers.

First and foremost, the Superintendent has the power and authority to recommend, withdraw, or amend regulations for the following purposes:

• To regulate the internal affairs of the Department of Financial Services (Department), including governing the procedures used in the practice of the Department;
• To prescribe forms and regulations; and
• To interpret state insurance laws and provisions. 

The Superintendent has the authority to take action deemed appropriate to ensure the following:

• Economic development and financial industry growth in this state;
• Solvency, safety, and prudent conduct of the insurance and financial services providers;
• Fair and timely fulfillment of the financial obligations;
• High standards of honesty, transparency, and fair business practices;
• Elimination of financial fraud, criminal abuse, and unethical conduct in the industry;
• Education of product users to enable them to make informed decisions about financial products and services.

If a person has been charged with 5 separate civil penalties within 5 years, the Superintendent may levy an additional penalty of up to $50,000. An additional civil penalty of up to $50,000 may be levied if the person is charged for every 5 subsequent violations.

When the Superintendent grants an approval, authorization, permission or any other order that affects an insurer, insurance agent or insurance broker, the order will not be effective unless it is in writing and signed by the Superintendent.

The notice will be considered delivered if it

• Is given to the person affected by the order; or 
• Has been placed in the United States mail and addressed to the person's last-known place of either business or residence.

Examination of Books and Records

The Superintendent may examine the books and records of any insurer, any pension fund, retirement system or organization authorized in the state of New York, as often as deemed necessary, for the protection of public interest.

The Superintendent will make an examination of insurers as follows:

• Every domestic fraternal benefit society and domestic property/casualty insurance company, at least once every 3 years. If the Superintendent determines that every 3 years is not necessary for property and casualty, it can be changed to every 5 years;
• Every domestic life insurer must be examined at least once every 5 years;
• Every other authorized domestic insurer and every rate service organization which makes or files rates at least once in every 5 years.

Unless otherwise required by law or regulation, an insurer must keep the following for 6 years, or until the filing of a review of the record, whichever is longer:

• A policy record for each insurance contract or policy (the time starts after the contract or policy is no longer in force); 
• An application where no policy or contract was issued;
• A claim file (the time starts after the claim is resolved and the file is closed);
• A licensing record for each licensee with which the insurer establishes a relationship; 
• A complaint record (the time starts after the complaint is resolved and the file is closed);
• A financial record necessary to verify the financial condition of an insurer.

If any person does not submit the requested information within 15 days, the Superintendent may levy a civil penalty of up to $500 per day for each day beyond the specified date. Total penalty cannot exceed $10,000.

2. Company Regulation

Certificate of Authority

No person, firm, association, corporation or joint-stock company may conduct insurance business unless authorized by a Certificate of Authority, issued by the state. If any business is transacted while not authorized, a penalty of $1,000 will be levied on the first violation and $2,500 for each subsequent violation.

In order to qualify for a certificate of authority, every person, firm, association, corporation or joint-stock company must meet the following requirements:

• The entity must fully comply with all applicable provisions of New York's insurance laws.
• If a stock company, the amount of capital and surplus required by law paid in cash or investments.
• If a mutual company, must provide statements of at least 3 incorporators, proof of the required initial surplus in cash or investments, and the required number and amount of bona fide (actual) applications for insurance, with premiums paid for in cash.

Every license must contain the following information:

• The name of the licensee;
• Home office address;
• The state or country under whose laws it was organized; and
• The kinds of insurance business it will provide and term of license.

After a notice and hearing, the Superintendent may refuse to issue a license to a company if any of its directors or officers has been convicted of any crime involving fraud, dishonesty, or moral turpitude (corruption, wickedness), or is considered an untrustworthy person.

The Division of Criminal Justice Services processes electronic fingerprints on a statewide basis for all individuals requiring a criminal background check. Fingerprinting is required for all adjuster, bail bond/charitable bail, and life settlement provider, intermediary, or broker licenses. Fingerprinting is also required for any person wishing to be an officer or director of an insurance company.

The Superintendent may also refuse to issue or renew a license if the business name is identical or so similar to an existing insurer name, that it is likely to deceive or mislead the public.

Solvency

An insurer is considered solvent if it has the assets to meet its financial obligations. If at any time an insurer becomes unable to meet financial obligations, it is considered insolvent.

It is the Superintendent's responsibility to make sure every insurer, fraternal, pension fund, retirement system or state fund remains solvent. Each entity transacting insurance in this state must file with the office of the Superintendent an annual statement on or before March 1st of each year showing its financial condition.

An authorized official of the insurer may verify the annual statement of an alien insurer. The statement must provide information on the business done and the assets held within the United States for the protection of policyholders and creditors, as well as the liabilities incurred against the assets.

If any authorized entity fails to file an annual statement as required or does not reply to a written inquiry within 30 days, there can be a penalty of up to $250 per day of delay, not to exceed an aggregate of $25,000 for each failure.

Guaranty Association

Guaranty Associations are formed to protect policyowners, insureds, beneficiaries, and anyone entitled to payment under an insurance policy from the incompetence and insolvency of insurers. The association will pay covered claims up to certain limits set by state law. The Association is funded by its members through assessment. All authorized insurers, which are required to be the members of the Association, contribute to a fund to provide for the payment of claims for insolvent insurers.

It is an unfair trade practice to make any statement that an insurer’s policies are guaranteed by the existence of the Insurance Guaranty Association. 

Unfair Claims Settlement Practices

The following are improper claims practices if committed in conscious disregard for the law or if committed with such frequency as to indicate a general business practice to engage in that type of conduct:

• Misrepresenting to insureds pertinent facts or policy provisions relating to coverages at issue.
• Failing to acknowledge and act reasonably promptly upon communications with respect to an insurance claim.
• Failing to adopt and implement reasonable standards for prompt investigation and processing of insured’s claims.
• Failing to affirm or deny coverage of claims within a reasonable time after proof of loss statements are completed and submitted by insureds.
• Not attempting in good faith to effect prompt, fair and equitable settlements of claims on which liability has become reasonably clear.
• Compelling insureds to initiate suits to recover amounts due under an insurance policy by offering substantially less than the amount ultimately recovered in those suits.

Appointment of Agent

Every insurer, fraternal benefit society or HMO doing business in New York must file a certificate of appointment for its agents with the Superintendent. The certificate states that the appointed agent is trustworthy and competent to transact insurance business.

To appoint an agent, the appointing insurer must file, in a format approved by the Superintendent, a notice of appointment within 15 days from the date the agency contract is executed or the first insurance application is submitted.

Certificates of appointment are valid until

• The license is terminated by the appointing insurer after a termination in accordance with the provisions of the agency contract;
• The license is suspended or revoked by the Superintendent; or
• The license expires and is not renewed.

Termination of Agent Appointment

When an insurer or HMO terminates an agent's certificate of appointment, it must file a statement with the Superintendent within 30 days, explaining the cause of the termination and facts surrounding it. The insurer or HMO must also provide a copy of this notice to the producer within 15 days of the date of filing with the Superintendent.

3. Licensee Regulation

Controlled Business

Controlled business is any coverage written on a producer's own life, health or property, and/or that of the producer's immediate family or business associates. A licensee is not allowed to collect commissions on controlled business above the state-specified limit. Most states will not issue a license to a person if it is determined that the primary purpose of the license is to write controlled business.

The Superintendent may refuse to issue, suspend or revoke a license if an applicant or licensee receives more than 10% of the aggregate commissions during a 12-month period from controlled business.

Sharing Commissions

An insurer or fraternal benefit society may not pay any commission to any person or organization that is not licensed in New York. Commissions can be split among agents/brokers provided that the agents/brokers are licensed with the same insurer for the designated lines of authority.

Fiduciary Responsibility

Agents, brokers and reinsurance intermediaries have a fiduciary relationship, a position of financial trust, for all funds they receive in the course of their business. Such funds may not be commingled with personal or other funds without express written consent of their principals. 

Premiums collected by agents and brokers not remitted immediately to insurers must be deposited in an appropriately identified account in a New York bank. Withdrawals from these accounts are allowed only to transfer premiums to the rightful insurers. Failure to submit funds appropriately could constitute embezzlement.

License Display

The establishing agent or broker must prominently display the license(s) of the supervising person(s) responsible for that place of business in a headquarters location and each satellite office.

Commissions and Compensation

Insurers and agents cannot pay a commission or provide compensation to a person or organization that is not licensed in New York. In addition, agents, brokers, consultants, surplus line brokers, reinsurance intermediaries and adjusters cannot pay any commission to or compensate any person who is not licensed and authorized in the same lines of insurance at the time of the transaction.

No licensed person may charge directly or indirectly any additional fees or compensation not authorizedfor examining, appraising, reviewing or evaluating any insurance policy, annuity or retirement plan. This also includes other services in connection with a life insurance contract. If compensation is authorized, it must be made in writing, including the amount of compensation and signed by the person to be charged. A copy of this record must be kept for at least 3 years.

Termination Responsibilities of Producer

After producers receive the notice of termination, they have 30 days to file written comments concerning the content of the notice with the Superintendent. The producer must send a copy of the comments to the reporting insurer at the same time. These comments will become part of the Superintendent's file and will accompany every copy of a report distributed or disclosed about the producer.

In the absence of fraud, bad faith or gross negligence as the cause for the producer’s termination, the terminated producer will not be subject to civil liability.

Reporting

Any licensee who believes that a fraudulent insurance transaction has taken place or is about to take place has 30 days from the point of that determination to submit information regarding that transaction to the Superintendent. The Superintendent will review each report and conduct further investigation as deemed necessary.

4. Disciplinary Actions

Hearings

Because the Superintendent's role is to enforce insurance laws and to protect the public from unfair trade practices, if the Superintendent suspects that an insurer or its agent has committed a violation or is engaged in an unfair trade practice, the Superintendent may issue a statement of charges and hold a hearing for any purpose deemed necessary (within the scope of the Insurance Code).

The hearing will be held at least 10 days after notice is served. At the hearing, the aggrieved party has the opportunity to:

• Appear in person and by counsel;
• Give evidence why an order should not be made;
• Inspect all documentary evidence and witnesses;
• Obtain witnesses on the person's behalf.

All hearings will be open to the public, unless the Superintendent or the person authorized by the Superintendent to conduct the hearing believes that a private hearing would be in the best interest of the public.

After the hearing, the Superintendent will complete a written report on his/her findings and send a copy to the person charged.

Once it has been determined that a person is liable for a civil penalty, that determination may be entered 120 days later as a judgment and enforced, without court proceedings.

Cease and Desist Order

If the Superintendent finds that the licensee is in violation of an unfair method of competition, unfair claim, or unfair act or practice, the Superintendent will issue a cease and desist order. This means the person must stop doing whatever the Superintendent suspects is in violation of the insurance laws.

A person who violated a cease and desist order is liable for penalties of up to $5,000 for each violation. The determination of the amount will take into consideration whether the violation was intentional.

Suspension, Revocation, and Nonrenewal

The Superintendent may refuse to renew, revoke, or suspend a license of any insurance producer, insurance consultant or adjuster, if, after notice and hearing, the Superintendent determines that the licensee or any sub-licensee has

• Violated any insurance laws or regulation, subpoena or order of the Superintendent or of another state's Commissioner;
• Provided materially incorrect, misleading, incomplete or untrue information in the license application;
• Obtained or attempted to obtain a license through misrepresentation or fraud;
• Used fraudulent, coercive or dishonest practices;
• Demonstrated incompetence, untrustworthiness or financial irresponsibility in the conduct of business in this state or elsewhere;
• Improperly withheld, misappropriated or converted any monies or properties received in the course of business;
• Intentionally misrepresented the terms of an actual or proposed insurance contract or application for insurance;
• Been convicted of a felony;
• Admitted or been found to have committed any insurance unfair trade practice or fraud;
• Had an insurance producer license, or its equivalent, denied, suspended or revoked in any other state, province, district or territory;
• Forged another's name to an application for insurance or to any document related to an insurance transaction;
• Improperly used notes or any other reference material to complete an examination for an insurance license;
• Knowingly accepted insurance business from an individual who is not licensed;
• Failed to comply with an administrative or court order imposing a child support obligation; or
• Failed to pay state income tax or comply with any administrative or court order directing payment of state income tax.

An individual, corporation, firm or association whose license has been revoked cannot obtain any license for a period of 1 year after such revocation, or, if such revocation be judicially reviewed, for 1 year after the final judgment.

If a firm loses its license, a member, officer or director of the corporation may be able to obtain a license if the Superintendent determines, after notice and hearing, that the person was not at fault.

If a nonresident producer's license is suspended, revoked or nonrenewed in his/her resident state, the license will also be suspended, revoked or nonrenewed in New York. Reinstatement in the producer's home state means reinstatement in New York.

If an administrative action has been taken against a licensee, the licensee must report it to the Superintendent within 30 days.

The Superintendent will give a written reason of action to the applicant or licensee. The applicant or licensee has 10 days to make a demand for a hearing.

Penalties

If the licensee is found in violation of insurance licensing laws, the Superintendent may issue a penalty in lieu of revoking or suspending the person's license. The penalty may be up to $500 for each offense, up to $2,500 aggregate for all offenses.

Unless the court orders a stay, the licensee has 20 days after receipt to pay the penalty. If the licensee fails to pay the penalty within the allotted time, the Superintendent may then revoke or suspend the person's license.

Any violation of the Insurance Code provisions will be considered a misdemeanor unless specifically categorized as a felony.

If, after a notice and hearing, the Superintendent finds that an authorized insurer, representative, broker or adjuster has willfully violated the Insurance Code, the Superintendent may order the person to pay a penalty of up to $1,000 for each offense. Failure to pay the penalty within 30 days of the order will constitute a further violation of the provision of the Code. However, no penalty will be imposed if a monetary penalty is otherwise provided by the New York Insurance Code.

Prohibitions

In addition to any criminal liability, the Superintendent may levy a civil penalty of up to $5,000 and the amount of the claim for each violation upon any person who committed a fraudulent insurance act, or knowingly and with intent to defraud, files, makes, or assists, solicits or conspires with another to file or make an application for a premium reduction containing any materially false information or that conceals information concerning any material fact.

Aiding Unauthorized Insurer

Neither a person nor a corporation may act as an agent or broker for an insurer that is not licensed to solicit, negotiate or effect any insurance or annuity contract, or aid any such insurer in effecting any insurance transactions. Note that the law allows for some exceptions for reinsurance brokers.

Any person who violates this regulation may be subject to a $500 penalty for each transaction, in addition to any other penalties provided by the state law.

5. Unfair and Prohibited Practices

Insurers and insurance producers may not engage in any trade practice that is defined as, or determined to be, an unfair method of competition or an unfair or deceptive act or practice in the business of insurance.

It is considered an unfair trade practice to knowingly commit an unfair method of competition or to engage in such actions with enough frequency that the commission of unfair marketing practices indicates a general business practice.

If, after a hearing, the Department determines that a producer or an insurer has committed an unfair trade or competition practice, the Department may issue an order requiring the person to cease and desist from engaging in the method of competition, act, or practice, and/or impose penalties for violation of insurance laws.

Misrepresentation

It is illegal to issue, publish or circulate any illustration or sales material that is false, misleading or deceptive as to policy benefits or terms, benefits, advantages, the payment of dividends, or the financial condition of any insurer. This regulation also applies to oral statements made by an insurer or its producers and representatives.

It is illegal for an agent or broker to show an incomplete comparison of policies to induce a person to lapse, forfeit or surrender a policy.

Any agent or broker who willingly commits misrepresentation and knowingly receives any compensation or commission for the sale induced by a misrepresentation is liable for a civil penalty in the amount received. In addition, the agent/broker is liable for a civil penalty in the amount of any compensation or commission lost by any agent, representative or broker as a result of making of false or misleading statements. Any person so offended may also sue the agent/broker for the amount gained and penalty paid during the misrepresentation.

It is considered an unfair trade practice in this state to knowingly misrepresent to a claimant the terms, benefits and advantages of the insurance policy pertinent to the claim. Insurers cannot deny any element of a claim on the grounds of a specific policy provision or exclusion unless reference to such provision or exclusion is made in writing. Any payment or settlement that does not include all the amounts reasonably expected from the claim will be deemed to be a communication which misrepresents a pertinent policy provision (as long as the claim payment is within the policy limits).

While the concept of misrepresentation during policy replacement applies specifically to life insurance and annuities, all agents and brokers (regardless of their line of authority) must be aware of and in compliance with this regulation. Any replacement of individual life policies or individual annuity contracts of an insurer by an agent, representative of the same or different insurer must conform to the following standards implemented by the Superintendent:

• Specify what constitutes the replacement of a life policy or annuity contract and the proper disclosure and notification procedures to replace a policy or contract;
• Require notification of the proposed replacement to the insurer whose policies or contracts are intended to be replaced;
• Require the timely exchange of illustrative and cost information necessary for completion of a comparison of the proposed and replaced coverage; and
• Provide for a 60-day period following issuance of the replacement policies or contracts during which the policyowner may return the policies or contracts and reinstate the replaced policies or contracts.

False Advertising

Advertising covers a wide scope of communication, from publishing an ad in a newspaper or magazine, to broadcasting a commercial on television or the Internet. Advertisements cannot include any untrue, deceptive, or misleading statements that apply to the business of insurance or anyone who conducts it. The violation of this rule is called false advertising.

It is prohibited to advertise or circulate any materials that are untrue, deceptive, or misleading. False or deceptive advertising specifically includes misrepresenting any of the following:

• Terms, benefits, conditions, or advantages of any insurance policy;
• Any dividends to be received from the policy, or previously paid out;
• Financial condition of any person or the insurance company; or
• The true purpose of an assignment or loan against a policy. 

Representing an insurance policy as a share of stock, or using names or titles that may misrepresent the true nature of a policy also will be considered false advertising. In addition, a person or an entity cannot use a name that deceptively suggests it is an insurer.

Rebating

Rebating is defined as any inducement offered in the sale of insurance products that is not specifiedin the policy. It is illegal to offer an inducement to a person to encourage the purchase of an insurance policy. Rebates include money, sharing of commissions, promises, inducements and personal services. Both the offer and acceptance of a rebate are illegal.

Articles of merchandise with a conspicuously stamped or printed advertisement of the insurer, agent or broker, are not considered rebates if they are valued at $25 or less.

Defamation of Insurer

Defamation occurs when an oral or written statement is made that is intended to injure a person engaged in the insurance business. This also applies to statements that are maliciously critical of the financial condition of any person or a company.

Unfair Discrimination

Discrimination in rates, premiums, or policy benefits for persons within the same class or with the same life expectancy is illegal. No discrimination may be made on the basis of an individual's marital status, race, national origin, gender identity, sexual orientation, creed, or ancestry unless the distinction is made for a business purpose or required by law.

6. Insurance Frauds Prevention Act

The Insurance Frauds Prevention Act is intended to permit the Superintendent and the department to utilize their expertise to investigate and discover insurance frauds, halt fraudulent activities more effectively, and receive assistance from federal and state law enforcement agencies.

Insurance Frauds Bureau

The Insurance Frauds Bureau in the Department continues its operations under the supervision of the Superintendent, who has the power to designate one or more units for the purpose of investigating and preventing fraud.

Procedures

If the insurance frauds bureau has reason to believe that a person is engaged or is about to engage in a fraudulent act, it has 30 days to make a report on the action, including any information relating to the circumstances and the parties involved.

The Superintendent has the power to make an investigation within this state or outside of the state.

Immunity

As long as the suspected fraudulent transaction was reported in good faith, no civil liability will be placed against the person who reported it.

Fraud Prevention Plans and Special Investigations Units

Every insurer writing private or commercial insurance must file a fraud prevention plan for the detection, investigation and prevention of fraudulent insurance activities within 120 days. The plan must include the details necessary for the proper implementation of the plan.

The following rules apply to the implementation of the plan:

• If the Superintendent does not return a fraud detection and prevention plan to the insurer within 120 days from the date of filing, it is considered approved.
• If the plan is returned, the insurer has up to 45 days to make the necessary revisions and return to the Superintendent.
• If the plan has been returned more than once, the insurer is entitled to a hearing.
• If the insurer fails to submit a final plan within 30 days after the determination of the hearing, the Superintendent may impose a fine of up to $2,000 per day or impose an appropriate fraud detection and prevention plan.

In lieu of a special investigations unit within the insurance company, an insurer may contract an outside company to provide the investigative services. This insurer must also file a detailed plan with the Superintendent.

7. Consumer Privacy Regulation

Treatment of nonpublic personal financial information about individuals requires the insurer to

• Provide notice to individuals about its privacy policies and practices, no later than the time an insurance policy is delivered, annually thereafter. If information is collected from a source other than the applicant or public records, notice must be given at the time the information is collected.
• Describe the conditions under which a licensee may disclose nonpublic personal financial information about individuals to affiliates and nonaffiliated third parties. If the insured requests or authorizes a transaction in connection with servicing, processing or maintaining of an insurance product, the insurer is exempt from the requirements of disclosure.
• Provide methods for individuals to prevent a licensee from disclosing that information. An opt out notice must be provided, to allow the consumer a choice to limit disclosure of personal information.

8. Producer Compensation Transparency

The regulation on Producer Compensation Transparency was promulgated to help regulate the acts and practices of insurers and their producers, as well as to protect the public by establishing minimum disclosure requirements regarding the role of insurance producers and their compensation.

For the purposes of this regulation, the term compensation means anything of value, which includes, but it not limited to money, credits, loans, trips, prizes or gifts, whether paid as commission or otherwise. Advertisement or promotional goods with the insurer's name or logo are not considered compensation, as long as their aggregate value per insurer per year is less than $100.

This regulation does not apply to the following:

• Placement of reinsurance;
• Placement of insurance with a captive insurer;
• Producers who have no direct sales or solicitation contact with the purchasers;
• Sale of insurance by a person who is not required to be licensed; or
• Renewals.

Disclosure of Producer Compensation

A disclosure of producer compensation must include the following information:

• A description of the producer's role in the transaction;
• Whether or not the producer will receive compensation from the sales;
• An explanation of factors that affect the amount of producer compensation;
• The purchaser's right to request and obtain information about the producer's compensation.

Producers are required to keep a copy of all written disclosures provided to the purchasers for at least 3 years.

9. Cyber Regulation

In an effort to combat the ever-increasing menace of hackers extracting sensitive data from companies' databases, the state of New York has instituted a new regulation outlining the minimum standards for a required cybersecurity program (23 NYCRR 500).

All financial services companies must implement and maintain a cybersecurity program designed to prevent cyberattacks and recover if one occurs. Senior management must be responsible for the organization's cybersecurity program and ensure the safety and soundness of the institution and protect its customers. Regulated entities must file an annual certification confirming compliance with these regulations.

Definitions

Covered Entity: any person operating under a license, registration, certificate, or similar authorization under the Banking Law, the Insurance Law, or the Financial Services Law.

Cybersecurity Event: any effort to obtain unapproved access to an Information System (or information stored on it), whether successful or unsuccessful.

Information System: an organized system that collects, maintains, and transmits electronic Nonpublic Information.

Nonpublic Information: any business-related information that is not publicly available information that if misused could jeopardize a covered entity's security and operations; any personally identifiable information (such as social security number or credit card numbers); and any information (other than age and gender) related to health care.

Multi-Factor Authentication: authentication through verification of at least two factors:

1. Knowledge factor, such as a password;
2. Possession factors, such as a token or text message on a mobile phone; or
3. Inherence factors, such as a biometric characteristic.

Penetration Testing means a test method where assessors attempt to circumvent or defeat the security features of an information system by attempting to penetrate databases or controls from outside or inside the information systems.

Chief Information Security Officer (CISO): Each covered entity must designate a qualified individual for overseeing and implementing its cybersecurity program and enforcing its cybersecurity policy.

Cyber Security Program

Each nongovernmental Person operating under the New York Department of Financial Services must design, implement, and maintain a Cybersecurity Plan based on its Risk Assessment that ensures the confidentiality, integrity, and availability of Information Systems. The 6 critical functions of the Cybersecurity Program are:

1. Identify cybersecurity risks;
2. Use defensive infrastructure and put policies and procedures in place to prevent cybersecurity risks;
3. Monitor and recognize cybersecurity events;
4. Counter any attacks to reduce undesirable outcomes;
5. Recover from such events; and
6. Report the event as obligated. 

The Cybersecurity Policy is an approved written document that identifies the policies and procedures in place to keep the Information System safe, and must encompass the following:

• Information security;
• Data governance and classification;
• Asset inventory and device management;
• Access controls and identity management;
• Business continuity and disaster recovery planning and resources;
• Systems operations and availability concerns;
• Systems and network security and monitoring;
• Systems and application development and quality assurance;
• Physical security and environmental controls;
• Customer data privacy;
• Vendor and third-party service provider management;
• Risk assessment; and
• Incident response.

Covered Entities must make sure that the nonpublic information and information systems accessible by Third-Party Service Providers (those who are authorized to access nonpublic information) are kept safe. To do that, the policies and procedures set forth must include the following:

• Identification and risk assessment of third-parties with access to such information;
• Minimum cybersecurity practices that must be upheld by third-party service providers;
• Processes in place to judge the effectiveness of the third-party's cybersecurity practices; 
• Annual (at minimum) evaluation of third-parties and their cybersecurity practices.

Training and Monitoring

As part of its cybersecurity program, each Covered Entity must:

1. Implement risk-based policies, procedures and controls designed to monitor the activity of authorized users and detect unauthorized access or use of, or tampering with, nonpublic information by such authorized users; and
2. Provide regular cybersecurity awareness training for all personnel that is updated to reflect risks identified by the covered entity in its risk assessment.

After a cybersecurity event has been discovered, an insurer or its agents must report the event to the Department of Financial Services within 72 hours.

C. Federal Regulation

1. Fair Credit Reporting Act

The Fair Credit Reporting Act established procedures that consumer-reporting agencies must follow in order to ensure that records are confidential, accurate, relevant, and properly used. The law also protects consumers against the circulation of inaccurate or obsolete personal or financial information.

The acceptability of a risk is determined by checking the individual risk against many factors directly related to the risk's potential for loss. Besides these factors, an underwriter will sometimes request additional information about a particular risk from an outside source. These reports generally fall into 2 categories: Consumer Reports and Investigative Consumer Reports. Both reports can only be used by someone with a legitimate business purpose, including insurance underwriting, employment screening, and credit transactions.

Consumer reports include written and/or oral information regarding a consumer's credit, character, reputation, or habits collected by a reporting agency from employment records, credit reports, and other public sources.

Investigative Consumer Reports are similar to consumer reports in that they also provide information on the consumer's character, reputation, and habits. The primary difference is that the information is obtained through an investigation and interviews with associates, friends and neighbors of the consumer. Unlike consumer reports, these reports cannot be made unless the consumer is advised in writing about the report within 3 days of the date the report was requested. The consumers must be advised that they have a right to request additional information concerning the report, and the insurer or reporting agency has 5 days to provide the consumer with the additional information.

The reporting agency and users of the information are subject to civil action for failure to comply with the provisions of the Fair Credit Reporting Act. A person who knowingly and willfully obtains information on a consumer from a consumer reporting agency under false pretenses may also be fined and/or imprisoned for up to 2 years.

An individual who unknowingly violates the Fair Credit Reporting Act is liable in the amount equal to the loss to the consumer, as well as any reasonable attorney fees incurred in the process.

An individual who willfully violates this Act enough to constitute a general pattern or business practice will be subject to a penalty of up to $2,500.

Under the Fair Credit Reporting Act, if a policy of insurance is declined or modified because of information contained in either a consumer or investigative report, the consumer must be advised and provided with the name and address of the reporting agency. The consumer has the right to know what was in the report. The consumer also has a right to know the identity of anyone who has received a copy of the report during the past year. If the consumer challenges any of the information in the report, the reporting agency is required to reinvestigate and amend the report, if warranted. If a report is found to be inaccurate and is corrected, the agency must send the corrected information to all parties to which they had reported the inaccurate information within the last 2 years.

Consumer reports cannot contain certain types of information if the report is requested in connection with a life insurance policy or credit transaction of less than $150,000. The prohibited informationincludes bankruptcies more than 10 years old, civil suits, records of arrest or convictions of crimes, or any other negative information that is more than 7 years old. As defined by the Act, negative information includes information regarding a customer's delinquencies, late payments, insolvency or any other form of default.

2. Fraud and False Statements including 1033 Waiver

It is considered unlawful insurance fraud for any person engaged in the business of insurance to willfully, and with the intent to deceive, make any oral or written statement that are either false or omit material facts. This includes information and statements made on an application for insurance, renewal of a policy, claims for payment or benefits, premiums paid, and financial condition of an insurer.

Anyone engaged in the business of insurance whose activities affect interstate commerce, and who knowingly makes false material statements may be fined, imprisoned for up to 10 years or both. If the activity jeopardized the security of the accompanied insurer, the punishment can be up to 15 years.

Anyone acting as an officer, director, agent or other insurance employee who is convicted of embezzling funds faces the aforementioned fines and imprisonment. However, if the embezzlement was in an amount less than $5,000, prison time may be reduced to 1 year.

Federal law makes it illegal for any individual convicted of a crime involving dishonesty, breach of trust or a violation of the Violent Crime Control and Law Enforcement Act of 1994 to work in the business of insurance affecting interstate commerce without receiving a letter of written consent from an insurance regulatory official — a 1033 waiver. The consent of the official must specify that it is granted for the purpose of 18 U.S.C. 1033. Anyone convicted of a felony involving dishonesty or breach of trust, who also engages in the business of insurance, will be fined, imprisoned for up to 5 years or both.

Section 1034, Civil Penalties and Injunctions for Violations of Section 1033, states that the Attorney General may bring a civil action in the appropriate U.S. district court against any person who engages in conduct that is in violation of Section 1033 of not more than $50,000 for each violation, or the amount of compensation the person received as a result of the prohibited conduct, whichever is greater.

Numbers, Dollars, Days, and Dates

In order to perform your best on the state regulations portion of the exam, make sure you memorize these numbers and their definitions.

Department of Financial Services Regulations:
5 years	Examination of domestic insurers other than property and casualty (3 years)
10 days	Notice given for hearing
10 days	For applicant or licensee to demand hearing after action
Licensing and Appointment Requirements:
18	Age to apply for license
2 years	Producer license is valid
60 days	Before license expiration, agent must file an application for renewal
5 days	License expires after renewal license is denied
90 days	Length of one-term temporary license
15 months	Maximum length of a temporary license
15 days	For insurer to file agent's appointment with the Superintendent
30 days	For insurer to notify the Superintendent of termination of producer's appointment
15 days	Send a notice of appointment termination to producer
Miscellaneous Producer Regulations:
20 hours	Prelicensing education for Life only or Accident and Health only agent or broker
40 hours	Prelicensing education for a Life, Accident and Health agent or broker, Personal Lines agent or broker and Public Adjuster
90 hours	Prelicensing education for Property/Casualty agent or broker
15 hours	CE required every 2 years
15 days	Provide requested information to the Superintendent
30 days	To inform Superintendent about change of address
30 days	To notify Superintendent of administrative action against producer
20 days	To pay penalty for licensing law violations without further action
30 days	To pay penalty for violation provisions of the Insurance Code
30 days	To report any fraudulent insurance transactions to the Superintendent
6 years	Keep records of insurance transactions
10%	Maximum allowed amount of commissions from controlled business in one year
Important Dollar Amounts:
$500	Penalty for each offense in violation of state insurance laws
$2,500	Maximum aggregate penalty for all offense in violation of state insurance laws
$10	Late fee for license renewal
$25	Maximum value of any merchandise given by an insurer, agent or broker to avoid rebating
$2,000	Fine per day without appropriate Fraud Prevention Plan
$2,500	Fine for willful noncompliance with Fair Credit Reporting Act
$5,000	Fine for violation of cease and desist order

D. Insurance Ethics

The information in this section will provide you with a greater understanding of important topics; however, it will not appear on the state exam.

1. Ethics in the 21st Century

Ethics: Principles and Practices

The purpose of this part of the course is to provide the foundation of knowledge and understanding that an individual needs to function ethically in his or her role as an insurance professional. Our concentration will be on the social, professional, and legal aspects of ethics.

It seems that in many news reports that a person reads or listens to these days, some insurance company or insurance agent is receiving negative publicity as a result of bad professional judgment or poor ethical conduct. Bad news usually attracts far more attention than that paid to the legions of insurance agents who perform their daily sales and service tasks in a thoughtful, fair, and ethical manner. Their exemplary work will be discussed in detail.

As you will discover, ethics can be studied on two levels:

1. Philosophically, where a code of personal ethics helps you gain personal and professional satisfaction; and 
2. Practically, where a code of personal ethics helps you avoid controversy and misunderstandings, which increases your personal efficiency as an agent. 

Understanding Ethics

At some time in your life, you've been exposed to the Golden Rule that states: "Do unto others as you would have them do unto you." Either taught by a parent, a teacher, or a religious leader, this golden rule not only promises spiritual satisfaction and fulfillment, but it also serves as a practical guide to an insurance agent's everyday business life.

To a certain extent, ethics is a set of instructions on how to deal daily with a group and a community. These instructions revolve around a single theme: "social behavior that favors the group over the individual." Antisocial behavior usually stems from individual selfishness and greed characteristics that are against the common good and disruptive to overall balance and harmony. Because ethical behavior on the part of the individual resulted in group harmony, communities turned to such ethics as the basis for common law, which in turn became the basis for our own civil and criminal codes of conduct.

Today, we live in a fast-paced society. Unfortunately, this pace does not always give us the necessary time to consider different choices of action or reflect upon the consequences of our words and deeds. This can create ethical problems. Moreover, some people tend to focus on practical and expedient solutions to their problems when their main consideration should be the ethical answer. In these situations, the practical solution may not be correct, and the cure could result in a condition worse than before.

Ethics Defined

Ethics is a derivative of the Greek word ethikos,meaning "moral" and ethos, meaning "character." By textbook definition, ethics is "a branch of philosophy that deals with the values of human life in a coherent, systematic, and scientific manner." The Oxford English Dictionary defines ethics as "the department of study concerned with the principles of human duty" and the "rules of conduct recognized in certain associations or departments of human life."

You won’t find universal agreement among philosophers as to what, exactly, is ethically right. Immanuel Kant, a German philosopher, believed what is right is based on pure reason. On the other hand, Jeremy Bentham, early 19th-century British philosopher, believed right to be that which will produce the greatest good. Religious philosophers, like St. Thomas Aquinas, say that right is determined by the will of God, and wrong is anything contrary to God’s will.

For the purpose of our work, we will use Albert Schweitzer's definition of ethics:

Ethics is the name we give to our concern for good behavior. We feel an obligation to consider not only our own personal well-being but also that of others and of human society as a whole.

Dr. Schweitzer, who was a French medical missionary and philosopher, applied this idea of "duty beyond the group" to all humanity. He believes that the ultimate goal of ethics is the fullest measure of justice for all. If we were to distill the philosophy of Dr. Schweitzer into three words, they would be "regard for others."

The Golden Rule

The Chinese philosopher Confucius said that ethics is the foundation of peace in a society. He believed that a body politic of "good brothers" living in moral harmony would result in an orderly and peaceful nation. The golden rule, in fact, comes from Confucius, who said, "What you do not want others to do to you, do not do to others."

The golden rule provides us with the most basic test concerning ethical conduct. You can easily determine whether a course of conduct is ethical simply by asking, "Would I want someone else to act in this manner toward me?"

It is interesting to note that this same test is a guidepost of the Chartered Life Underwriter: proposing a life insurance solution (to a client's problem) that you yourself would purchase.

Failure to apply the golden rule will result in two separate standards of ethics. One standard is how you treat others; the second is how you expect others to treat you.

Ethics—A Way of Life

When we discuss ethics, we are not dealing with a set of hard-and-fast scientific rules, but rather with attitudes, ideas, and beliefs. Ethics is really a set of instructions for a way of life. Ethics presents an individual with a way to live harmoniously with others.

Ethics, like religion, favors the group over the individual. Quite simply, if the individual is completely self-seeking, then the group will most likely suffer. The phrase "Love thy neighbor as thyself" is pure ethics; it serves as a brake on antisocial behavior.

Ethical business practices, in turn, can help foster satisfied customers, as well as a stable economy. In this context, ethics is about social justice, making sure that people receive benefits from every decision made.

How Do We Define Success?

Unfortunately, our society isn't always critical of wrongdoing. For example, many people are impressed with the wealth accumulated by some individuals and ignore the means by which it was gained.

This tendency to emphasize personal financial gain is a common way many businesses, including the insurance industry, motivate their employees. Financial gain is often held out as the primary measure of success. This is not to say that pursuit of financial gain is wrong; however, consider how incentives such as "Top Agents of the Month" rosters have the tendency to spotlight financial achievement while ignoring professionalism and public service. What about an agency atmosphere that stresses results by any means? Shouldn't those who have achieved ethical success, those who have best served the needs of their insurers and the public, be honored, too? An overemphasis on financial rewards can lead to looking at prospects and clients on the basis of "What can I get from them?" as opposed to "What I can do for them?"

Certainly, insurance agents should expect to be adequately rewarded for success, and production figures are vital to the well-being of any agency or insurance company. However, no less important is meeting the needs of clients and the public in a proper and ethical manner. Self-interest is fine, but not when maintained at any cost, not at the cost of your self-respect and not at the cost of others.

The Ethical Balance Sheet

Ethics does not have to be incompatible with capitalism. "Profit" is not a dirty word. In the long run, good ethics is indeed good business. Hard but fair competition cannot help but benefit the public.

Selling life insurance is an aggressive profession accustomed to vigorous competition. In fact, that vigorous competition leads to a better serving of the public's needs. Applying the golden rule does not mean that you should allow someone else to make the sale, hoping that he or she might let you make the next one. If someone asked you to sign a written agreement after telling you what the document contained, it would not be unethical to read the document anyway before signing. Ethics is personal in nature and does not demand that you trust others implicitly. You have no control over the conduct of others, only over your own.

Ethics as a Legal Force

For some, there is a conflict because ethics deals with the way things ought to be, which is not necessarily practical in our society. These individuals get wrapped up in differences between ethical and legal - two completely separate concepts. Ethics is right for rights sake, while the law represents a set of minimum standards that society demands.

Ethics usually precedes the law. While many ethical standards of conduct have been codified, many have not. So something can be legal but not ethical. For example, it is legal to sell a prospect more life insurance that he or she can afford, but this is not ethical. Ethics goes beyond the letter of the law and entails not only what a person "must do" but also what a person "should do."

However, it should be noted that the law does not provide a very specific ethical direction for everyone through civil and criminal statutes. Under the law, ethical conduct is generally defined as that which a reasonable person is expected to follow under any circumstances. Also defined in the law are illegal and improper conduct and the penalties for such conduct.

In spite of this merger of the legal and ethical, there is still a distinction between the two. How often have your heard people ask, "Well, were my actions illegal?" And when they were told that their actions were perfectly legal, they assumed that their actions were also acceptable. 

The integrity and truthfulness of a company’s policies are subject to scrutiny by the general public. Public pressure may force a business to revise its practices. All of this means that what is legal today--but unethical--could become illegal tomorrow, depending on changes by the community to bring reform. 

However, relying on legalities alone can become the easy way out. Paying attention to "have-to" rules and regulations at the expense of "choose-to" ethical standards can keep the individual out of legal trouble but can also result in a delusion of success. Ethics has more to do with approval from the man or woman in the mirror than it does with approval from one’s manager or the insurance company that one represents. 

Honesty

In our modern society, it may not be possible for an individual to live in an absolutely honest manner. Completely honest people who refused to tell white lies to protect the feelings of others would have few friends. However, there is a big difference between telling your Aunt Betty that you love her atrocious new hairstyle and telling a client that he/she needs more life insurance than is actually necessary.

2. Ethics for Insurance Agents

Consider These Questions

Is it ethical for an insurance agent to use for a prospect list the names of individuals who registered for a new home in a supermarket drawing?

Is it ethical for an insurance agent to call himself or herself a financial planner or an estate planning specialist without the proper training, experience, or qualifications?

Is it ethical for an insurance agent to show a prospect a policy illustration without explaining the difference between guaranteed and nonguaranteed benefits?

Of course, the answer to all of these questions is "no." None of these situations shows proper ethical behavior by an insurance agent. No matter how extreme these examples might seem, they represent ethical responsibilities that an insurance agent is expected to fulfill. An agents four primary ethical responsibilities are to the following:

1. Insurer; 
2. Policyowners; 
3. General public; and 
4. State. 

Each of these areas will be discussed in detail in the following sections, but let's take a brief look at them now.

Ethical Responsibilities to the Insurer

The duties of an insurance agent to his or her insurer are established by the concept of agency. This concept is tangibly represented by the agency contract, which both parties agree to and sign. Within the scope of that contract, the insurance agent owes to his or her insurer the duties of honesty, good faith, and loyalty. He or she also is obligated to reveal to the insurer all material facts concerning the agency.

In carrying out his or her duties, the insurance agent is the direct representative of the insurer. His or her day-to-day activities are a direct reflection on the insurer's image within the community. Should the agent behave unethically, everyone in that community is given to believe that the insurer is also unethical.

Ethical Responsibilities to Policyowners

The professional agent can meet his or her ethical responsibilities to an insured policyowner by filling needs and providing quality service. Service is a primary function of the insurance industry. The way that service is provided often determines the agent's future, since clients are a good source for future sales and references.

In addition to quality service, the agent also owes the policyowner the same degree of loyalty that he or she provides to the insurer. The agent is also charged with the ethical responsibilities of full disclosure, confidentially, timely submission of all applications, and prompt policy delivery.

Ethical Responsibilities to the Public

The insurance agent has more control over the public's attitude toward insurance than sales representatives for most other consumer products. This is because the insurance agent initiates contact with a prospect, determines a prospects need for insurance, recommends a certain product or solution, makes the sales presentation, and finally develops a long-term relationship with after-sale service. In many cases, the prospect has little or no direct contact with the insurance company.

Because this special relationship involves a great deal of contract between the consumer and agent (and because the public generally understands very little about insurance), public perceptions of the industry itself are based on how well, or how poorly, an agent does his or her job. Thus, the professional insurance agent has two main ethical responsibilities to the public:

1. To inform the public about insurance with the highest level of professional integrity; and 
2. To strive for an equally high level of professionalism in all public contacts in order to maintain a strong, positive image of the industry. 

Ethical Responsibilities to the State

The responsibility to regulate the insurance industry is shared by the federal and state governments. However, the states carry the burden of regulating insurance affairs, including the ethical conduct of licensed insurance agents. In some states, the regulation of ethical conduct falls under the category of "marketing practices," while other states refer to it in the context of "unfair trade practices."

Whatever it is called, all states have established a code of ethical standards for insurance agents by defining, through laws and regulations, what an agent can and cannot do. Although these laws differ from state to state, there are enough similarities to discuss them in general terms. This will be the subject of the next section, in which ethical standards for financial planning and the Investment Advisers Act will also be discussed.

Ethical Issue Number One

Ethical Issue Number One: Good Intentions Don’t Replace Experience

John and Sue were members of the same agency. John had been with the agency for many years and was experienced in developing employee benefit packages for start-up companies. Linda was new to the insurance business.

John was going out of town to make a service call on one of his cases. While he was packing his briefcase, he noticed that Sue was sitting at her desk, and she appeared to be totally overwhelmed. "What’s wrong?" he asked, noticing Sue’s confusion.

"I’ve made 40 calls this morning--and so far no appointments," she said. "What am I doing wrong?"

John grinned. "Maybe you should have made 50 calls. Tell you what," he said, reaching for his appointment book. "Today’s your lucky day. Al Brewster over at Top-Notch Tools needs to talk to someone about a 401(k) plan for his hourly, salaried, and executive groups. You might try for an appointment."

At their sales appointment, Al Brewester said to sue, "Tell me what kind of tax advantages I can gain if I move my current pension plan over to a 401(k) plan."

Sue remembered a part in the company manual that covered that question. "Mr. Brewester, if you're currently administering a defined benefit pension plan for all your employees, you're paying far too much out of your company treasure for a limited tax break. I can promise you that you will not only be able to cut your annual contribution with a 401(k), but you'll also be able to customize a retirement plan for all three of your employee groups: hourly, salaried, and executive."

Al Brewester was really impressed. "My fiscal year starts in 2 weeks. Can you get something worked up for the accounting department by next Tuesday? If you can, you've got a sale. If you can't, tell me now and I'll go somewhere else."

Sue didn't hesitate. "I will handle this case myself, Mr. Brewester. I specialize in 401(k) plans. What time on Tuesday do you want to meet?" She knew that with the help of the manual, she could get the job done for Al Brewester.

Ethical Responsibilities to the Insurer

A potential source of ethical conflict for insurance agents can be a lack of understanding of the contractual relationship that they have with their companies. Understandably, an individual new to the business or one joining a new company will be concerned with the day-to-day matters of insurance sales matters such as quotas, territories, commissions, products, training, support, service, underwriting practices, premium rates, and competition and may have little time to contemplate the other duties and responsibilities that he or she has accepted by signing the agency contract. In this section, we will examine the ethical responsibilities that an agent owes to his or her insurer.

The Concept of Agency

The relationship between an insurance agent and his or her company is governed by the concept of agency. Agency is a legal term that describes the relationship between two parties, in which one, the principal, has authorized the other, the agent, to perform certain legally binding acts on the principal's behalf. In most agency relationships (including that of an insurance company and its agents), these acts involve making contracts between the principal and outside parties. In carrying out these duties, the agent, in effect, "becomes" the principal and assumes the principal's identity when performing the authorized acts. When an agent acts within the scope of his or her authority, the law takes the position that the actions of the agent are also those of the principal.

Power

The essence of an agency relationship is power. Before an individual can act as an agent and establish contracts between the principal and outside parties, he or she must have the power to do so. In the case of an insurer and an agent, this power is granted through an agency contract, which is how an insurer appoints an individual to act on its behalf.

Authority

The concept of authority is related to the concept of power. Although the two words are often used interchangeably, their definitions are distinct. The agency contract gives the agent the power to act on behalf of the principal and, at the same time, describes the actions that the agent is authorized to take. Technically, only the authorized acts of an agent can bind a principal; practically and legally, however, an agent's authority can be quite broad.

For example, an agent is given the power to sell and service an insurer's policies, but he or she is authorized to do so only within a certain geographical area. One of the important implications of an agency relationship, and occasionally a source of conflict, is that an agent has the power to take actions that he or she may not be authorized to take.

In essence, there are three types of agency authority: express, implied, and apparent.

Expressed Authority

Express authority is the authority that a principal intends, actually does, in fact, give to its agents, either orally or in writing. Usually written, express authority spells out the actions that the agent can and cannot perform for the principal. For example, through the agency agreement, a life insurance agent is given the express authority to solicit applications for life insurance and collect the initial premiums for those policies.

Implied Authority

Implied authority is authority that is not expressly granted--but which the agent is assumed to have in order to transact the business of the principal. It includes those acts that are incidental to the accomplishment of the expressly authorized acts. For instance, when an insurer has expressly authorized an agent to solicit an application and accept premium payments, it also implicitly authorizes the agent to issue a conditional receipt that is binding on the insurer.

Apparent Authority

Apparent authority is the appearance of--or the assumption of--authority based on the actions, words, or deeds of the principal or because of circumstances that the principal created. In effect, the principal creates the "appearance" of authority. If a third party in good faith relies upon the principal’s intentional or negligent permissiveness in regard to the agent’s acts, the principal will be bound by the acts of the agent because the agent possessed apparent authority. 

However, the apparent authority of an agent must be derived from the actions of the principal. For example, if an agent’s agreement with an insurer authorizes him or her to solicit applications only within a specified geographical area, but the company accepts an application and issues a policy outside that area, the apparent authority of the agent to operate outside of that area has been established (or ratified) by the insurer. Statements or actions of an agent alone are not sufficient to create apparent authority. 

Limitations on Authority

Rarely is an agent's authority to act for a principal unlimited. In most agency relationships, an agent's activity is restricted to some extent. For example, while an insurance agent is authorized to solicit applications, he or she cannot accept or reject a risk. An insurance agent cannot modify a contract or waive exclusions. An insurance agent cannot adjust premium rates. These acts are reserved for the company. Typically, the limits to an agent's authority are spelled out in the agency agreement, and it is within those powers that an agent must act. To step beyond those limits is to invite problems.

3. Beyond the Contract

This section will provide a brief overview of the agency concept in order to provide a basis for understanding the contractual relationship that an insurance agent has with his or her company. Obviously, the ethical significance is that an agent must, first and foremost, serve the insurer. The agent must live up to the contract and operate within the scope of his or her authority. But actually, an agent's duty to the insurer goes far beyond the wording of the contract. By entering into this contractual relationship, an agent has also entered into a fiduciary relationship.

The Agent as a Fiduciary

A fiduciary is an individual whose position and responsibilities involve a high degree of trust and confidence. Trustees, guardians, and executors, by virtue of their responsibilities, are fiduciaries, and so are insurance agents.

An insurer places a great deal of trust and confidence in its agents; consequently, an agent must exercise a corresponding high degree of fairness and good faith, acting in the best interests of the insurer.

Through his or her appointment, an insurance agent is generally given the power and express authority to act for the insurer by:

• Soliciting applications for coverage; 
• Describing coverage and policies to prospects and applicants and explaining how the policies can be purchased; 
• Collecting premiums (or in some cases, only initial premiums); and 
• Providing service to prospects and the insurers policyholders. 

Thus, while the provisions of the agency contract tell agents what acts they are authorized to perform, how they go about those tasks is usually left to their own judgment and discretion. But keep in mind that both actions and judgments are held to fiduciary standards.

Serving a fiduciary role demands high ethical standards and performance. In fact, those who depend on fiduciaries exact of them a higher standard of conduct than is required in the usual course of events. For example, assume that a customer at a grocery store is mistakenly given more change than is owed. Ethically, the customer should return the difference - that would be the right thing to do. However, other than the motive or desire to do what is right, there's nothing else compelling the customer to give back the additional money. By comparison, a fiduciary acts in accordance with ethical standards not only because it's the right thing to do, but because he or she must. That is the essence of a fiduciary's role.

So, let's look beyond what an agent is expressly authorized to do and examine the ethics of the fiduciary relationship that he or she has with the insurer.

Loyalty to the Insurer

The primary ethical responsibility that an agent owes to the insurer is loyalty. This means that he or she must, at all times, act in the insurers best interest in every matter involving the insurers business. Thus, by extension, an agent cannot act for himself or herself if personal objectives run counter to the insurer's interest.

For instance, while it is common for independent insurance agents and brokers to represent several insurers with the full knowledge and consent of the other insurers, in many agency relationships, unless the agent is specifically authorized to do so, he or she cannot represent competing principals.

An agent is also charged with conforming to the limits of his or her authority and staying within the guidelines of the agency contract.

Care and Skill

An agent has a duty to carry out his or her actions with utmost care and skill. As the insurers authorized agent, the agent represents the company to the public and must act accordingly. In some cases, this means that the agent must refer the business to others who are more qualified if the agent is not qualified to handle it.

Full Disclosure

An agent is obligated to fully disclose all information that may affect the insurer and its ability to conduct business. Practically speaking, full disclosure is most significant during the application and claims-handling processes. An agent must complete all application and claim forms as accurately as possible. Failure to do so could lead the insurer to follow a course of action that it would not otherwise take (such as issuing a policy to an applicant whose bad health had been concealed).

Therefore, it is the agents or brokers responsibility to see that the answers to questions on the application are recorded fully and accurately. Anything less than full disclosure may prompt the insurer to act in a way that is contrary to its own interest. 

Prompt Action and Follow-Up

An agent has the obligation to act promptly in all matters regarding the insurers business, but most significant is the responsibility to transmit competed applications and notice of premium receipts as quickly as possible. The insurer cannot begin the process of issuing insurance until it has received an application. Unless the applicant has been given a binding receipt, he or she remains at risk until the policy is issued. On the other hand, if an applicant is given a binding receipt at the time of application, the insurer is obligated to provide coverage, until and unless the applicant is formally rejected. In either event, a delay by the agent in turning over an application or notice of premium receipt may place the applicant or the insurer in jeopardy.

Handling of Premiums

Most agents are authorized to collect initial premiums from applicants; some are also allowed to collect renewal premiums. By law, payment to an agent is considered to be payment to the insurer. The agent has the fiduciary duty to account for all funds that he or she receives in connection with the insurers business and to turn these funds over promptly. Even if there is no legal intent, it is unethical to delay or withhold premium payments. In many states, it is illegal to combine premium monies with personal funds. Rarely would it be ethical to do so anyway, regardless of whether a specific law exists.

Avoiding Conflicts of Interest

Ethically, an insurance agent who has signed an exclusive contract with his or her insurer cannot serve two principals at the same time. As a "captive" agent, he or she owes a singular loyalty to that insurer. It would be unethical for that agent to represent two insurance companies selling the same policies. In addition, an agent has the ethical obligation to inform his or her company about any other related services that he or she provides and receives payment for. An agent who does part-time preparation and filing, for example, or who serves as a consultant to a local business, should inform his or her company of this activity. The insurer can then determine if there is a conflict of interest.

Independent agents also face this issue when they attempt to serve their clients while being contracted to an insurer. Conflicts can be avoided if independent agents follow these guidelines for dual agency:

• The agent represents the insurance company when insurance is being applied for and when it is in the process of being underwritten, in recordkeeping and in claim settlement or other insurer-related activities. 
• The agent "represents" his or her client only during the process of helping the client select the insurance plan best suited to the client's needs. 

Careful Solicitation

An agent has the ethical duty to protect the insurer's interest by soliciting business that appears to be good and profitable for the insurer. Although at some point every agent will submit an application that is rejected or will write business that quickly lapses, the obligation to exercise reasonable care in soliciting quality business is constant.

At the same time, once an agent has taken an application, he or she has the duty to submit it, even if it appears that the applicant may be a poor or uninsurable risk. Whether or not an individual is issued coverage is a decision for the insurer's underwriters.

Competitive Integrity

The insurance industry is highly competitive. For an agent, there exists ample opportunity to conduct business inappropriately at the expense of a competitor. Misrepresentation or defamation of a competitor casts a dark reflection on the entire industry. As a duty to his or her insurer and to the industry itself, an agent must resist this temptation. Ethics requires that an agent acknowledge the worth of other agents and their policies and compete only on the basis of the value of the products and service that he or she can provide.

Duties of the Principal to the Agent

The relationship between the agent and the principal is a two-way street. The principal also owes certain duties to the agent. A rule of agency law is that the principal is responsible for all of the agent's acts when he or she is acting within the scope of his or her authority. This responsibility includes fraudulent acts, omissions, and misrepresentations.

The principal, then, must carefully select honest, loyal, and hard-working agents to protect itself from potential liability. In return, the principal gives the agent:

• Compensation, or payment, for the business that the agent has given to the principal; 
• Employment (The principal must specify a reasonable period of time during which the agent is expected to produce a certain amount of business.); and 
• Indemnity. The principal is obligated to reimburse the agent for any damages or expenses incurred in defending against claims that the agent may be held liable for in the course of fulfilling his or her agency obligations. 

Who is an Agent of the Insurer?

Up to now, this course has focused on the relationship between the insurer and the insurance agent. The preceding explanation of legal and ethical principles has been based on the assumption that the agent works singularly for one insurer.

But what is the relationship of a broker to an insurer? How do these principles apply to those who represent more than one insurer? Let's take a look.

Is a Broker an Agent?

An insurance broker is one who places business with more than one company and has no exclusive contract requiring that his or her business first be offered to a single company. Legally, a broker obtains insurance for anyone who requests him or her to do so and represents the customer. For this reason, the insurance broker is an agent of the applicant. "Broker" and "brokerage" are not interchangeable terms. In insurance, brokerage is often used to describe business placed by persons who are not regular members of the insurers agency force.

A full-time career agent of one insurer may also have a broker's license and submit occasional applications to another insurer. This can happen when coverage is available through the second insurer that is not offered by the first.

Any life insurance agent may represent the insurer for some purposes and the applicant for others. This occurs frequently in the brokerage business.

There is an exception to the general rule that an insurance broker represents the client. This occurs when an insurer gives a policy to a broker for delivery to an insured. During the delivery process, the broker becomes the agent of the insurer. Should collection of premium be involved, payment to the broker would be considered as payment to the insurance company.

A Broker’s Responsibilities to the Insurer

The insurance broker represents the buyer of insurance in most parts of the insurance transaction and, therefore, owes all of the duties of an agency relationship to the client. However, even though a broker technically represents the clients, the ethical and fiduciary standards that apply to an agent also apply to a broker.

For example, a broker has the duty to fully disclose all information that he or she has regarding an application for insurance. A broker is charged with carrying out his or her actions with utmost skill and care. A broker should seek quality business and provide prompt, exacting service. A broker must complete fairly and ethically, relying on his or her abilities, and not operate at the expense of other agents. 

Actually, it makes little difference whether an individual represents one insurer or works with a number of insurers; the ethics and fiduciary standards are virtually identical. 

4. Ethical Responsibilities to Policyowners

Some people believe that an insurance agent's greatest single obligation is to his or her policyowners. Yet, if you are an agent of the insurer, how can this be? How can an insurance sales representative serve the best interests of both the insurer and policyowner? The answer lies in knowing that these interests are not really in conflict. By promoting the concepts that insurers stand for and by selling the appropriate products in the appropriate situations, in a competent, professional manner, the agent meets the needs of both the insurer and the insured. In this section, we discuss how agents can fulfill their ethical responsibilities to policyowners through needs selling and quality service.

Selling to Needs

Before an individual becomes a policyowner, he or she is a prospect. The transition from prospect to policyowner—and ultimately from policyowner to client—comes about when an agent follows two basic rules: 

1. Sell to needs.
2. Service the sale. 

In doing so, the agent will also live up to the ethical duties that he or she has to policyowners. 

An insurance agent has one principal reason for calling on a prospect: to offer a product or service that will benefit the prospect in some way. An agent must sell the kinds of policies that will best fit the prospect’s needs and in amounts that he or she can afford to pay. No one profits—not the insurer, not the agent, and especially not the policyowner—if an individual is coerced or misled into buying too much insurance or purchasing coverage that doesn’t suit specific needs. 

Fortunately, most agents recognize that selling to fit needs is the best approach to the products and services that they represent. They know that specific types of insurance policies are designed to meet specific needs and that matching policies to needs produces the maximum effect, to the benefit of the policyowner. They also know that needs selling involves problem analysis, action planning, product recommendation, and plan implementation. This requires two important commitments on the agent's part:

1. A commitment to obtain and maintain the knowledge and skills necessary to carry out those tasks; and 
2. A commitment to educating the prospect or client about the products and plans that may be implemented. 

Commitment to Knowledge and Skills

The relationship between the professional insurance agent and the policyowner is usually built upon the policyowner’s trust in the agent’s knowledge and skills. The policyowner must rely on the agent to provide informed options and trusts that the recommendations for insurance are in the client’s best interest.

An agent thus has an obligation to ensure that this trust is justified. This means that an agent has the ethical responsibility to obtain the necessary knowledge and skills needed to evaluate and service the insurance needs of clients. Indeed, the term "professional" implies knowledge and skill. If the agent feels that he or she is not properly trained to perform the needed service, then another professional should be called in to assist.

An agent must also keep his or her base of knowledge and skills current. To this end, the agent must be committed to a program of continuing education. He or she must also stay informed of the latest developments affecting a client’s interests. In recent years, there has been an increasing trend toward insurance professionalism. Agents should be competent professionals with a high degree of technical knowledge so that they can match a prospect’s need with the appropriate solution.

Commitment to Educating the Prospect or Client

Client trust must be earned, nurtured, and constantly reinforced. The agent who remembers this basic rule is the agent who communicates to his or her client the reasons why a particular insurance policy or program is being recommended and how it will serve the client.

Individuals who understand what a particular insurance plan or policy will do for them are more likely to buy, more likely to be satisfied with their insurance, and more likely to keep their business on the books. This communication and education continues long after the particular policy or program is sold and becomes part of the overall insurance program designed for that client. As noted earlier, the professional agent has established his or her client’s insurance program based on needs. These needs should be reviewed annually, supported by explanation and communication of the programs put in place to meet those needs. 

Service the Sale

Selling to needs is only part of what an agent must do to meet the ethical responsibilities that he or she owes to a policyholder. Service during and after the sale is just as important. Quality and productivity experts such as W. Edwards Deming and Joseph M. Juran see service as a process in which the customer's wants and needs are anticipated and then satisfied. Most companies today are committed to giving their customers quality service.

In fact, the quality of a company's level of service is perceived as the most important single factor affecting a business unit's performance in the long run. Since 1972, the Strategic Planning Institute (SPI) of Cambridge, Massachusetts, has collected data to determine what corporate strategies influence performance. SPIs studies consistently show that successful companies stress quality service over their competitors.

What Role Does Ethics Play When it Comes to Service?

Perhaps one of the most important aspects of business ethics is that the characteristics one associates with an ethical person such as fairness, honesty, and personal responsiveness, affects the level of service that a company provides. For example, an insurance agent who doesn't promptly return a client's telephone calls or procrastinates in giving a client important information about a policy will only hurt his or her reputation as a responsible professional. Therefore, treating clients with ethical principles will result in a high level of quality service.

Keep in mind that the term "service" means many things, and no two people would define all that it entails in precisely the same manner. However, for the purpose of this discussion, we will cover the elements of service in the context of ethical selling and professional responsibility. Thus, we will define "service" to mean:

• Educating the client before, during, and after the sale. 
• Ensuring that the client fully understands the application and underwriting processes, the policy purchased, and any attached riders; 
• Treating with confidentially the clients financial and personal affairs; 
• Disclosing all information needed by the policyholder or applicant so that he or she can make an informed decision; and 
• Showing loyalty to the client, which includes providing the full range of services offered by the insurer.

Service Begins with the Application

In securing coverage for your client, your main responsibility as an agent is to act reasonably under the circumstances. This means that you must also adhere to your ethical responsibilities to the insurer and see that the prospect completes the application accurately and completely.

At this point, your primary responsibility is to the insurer because you are acting as its agent during the application process. Remember that the insurer is relying upon you for full disclosure of all pertinent information regarding the applicant. However, you also have an ethical responsibility to educate your prospective insured to make sure that he or she fully understands the nature of the application process:

• Why the information is required; 
• How it will be evaluated; 
• The need for accuracy and honesty in answering all questions; and 
• The meaning of terms such as "waiver of premium", "automatic premium loan", "nonforfeiture options", and "conditional receipt." 

The Conditional Receipt

Because the conditional receipt is occasionally a source of misunderstanding with applicants, let’s clarify what is and how insurance agents should explain it.

A conditional receipt is normally given when the applicant pays the initial premium at the time the application for a policy is signed. This means that the applicant and the company have formed what might be called a "conditional contract," one contingent upon conditions that existed at the time of application or when a later medical examination is completed. In other words, a conditional receipt provides that the applicant is covered immediately from the date of application, as long as he or she passes the insurer’s underwriting requirements. If a medical examination or blood profile is subsequently required, the date of coverage begins once the applicant passes the medical examination.

This information regarding the conditional receipt should be made clear to the applicant. Many applicants accustomed to homeowners or automobile insurance—where coverage is available immediately upon issuance of the binding receipt—assume that their life insurance coverage is also effective upon submitting the application and premium. It is your ethical responsibility to explain that the applicant is covered on the condition that he or she proves to be insurable and passes the medical exam, if required. 

Explaining the Underwriting Process

Another ethical responsibility that you owe your applicant is to briefly explain the underwriting process that the application will undergo. Although many insurance policies are issued on the basis of the application alone, others require additional information. No prospect should ever be surprised that he or she could be subjected to further underwriting. Therefore, the explanation of the underwriting process should include a description of the checks and balances that apply to underwriting a risk, such as the Medical Information Bureau, the inspection report, and the credit report

The Medical Information Bureau (MIB)

The Medical Information Bureau (MIB) serves as a clearinghouse of medical information concerning applicants and helps to disclose cases where an applicant conceals or submits misleading medical information. A life underwriter can check the MIB for information on an applicant's past medical history. This possibility should be explained to your applicant when you ask for a signature on the MIB form.

The Inspection Report

An inspection report provides details on an applicant's lifestyle, finances, and exposure to abnormal hazards. An inspection report is usually ordered on applicants who apply for large amounts of insurance. It's conceivable that the prospects friends and/or employer may be contacted for purposes of an inspection report. The purpose of this report is to provide a picture of an applicant's general character and mode of living.

The Credit Report

A credit report is ordered when there is reason to question the applicant's ability to pay the premiums and to determine whether he or she may be a poor credit risk. Applicants who have questionable credit ratings can cause an insurance company to lose money. Applicants with poor credit standing are likely to allow their policies to lapse within a short time, perhaps even before a second premium is paid. Again, the purpose of this report should be explained when you ask the applicant to sign the authorization form.

The Importance of the Application to the Applicant

All of the information submitted on an insurance application has a direct bearing on whether the policy will be issued as requested, whether the application will be rejected, or whether another policy will be offered by the insurer. An agent who knowingly or unknowingly fails to provide all the necessary information about a prospect is not serving anyone's best interest.

Consider, for example, that you visit a prospective client in his home. You ask if he has any dangerous hobbies, and he says that his most dangerous activity is serving as an armchair quarterback for his favorite football team. As your client is filling out the application, you notice a picture on the wall of your client with a group of several other people on a mountain hiking expedition. When you mention this, your client remarks that as a hobby, he is a mountain climber and leads people on tours up Mount Everest. This is definitely more dangerous than serving as an armchair quarterback.

Because you are afraid that your client will not be issued an affordable policy if this detail is mentioned, you advise him to omit it from the application. The policy is later issued, and all is well.

But, what happens if, a year later, the insured is killed in a mountain-climbing accident? It's quite likely that the insurer will contest or deny the claim, citing concealment. Rather than getting the policy proceeds, the family receives a return of premiums paid. What benefit did this policy provide? What kind of service did you render?

This example illustrates why precision and accuracy in completing the application are in the best interest of both the insurer and the prospective insured. It is vital that an agent understands this and explains the need for full disclosure to an applicant.

Confidentiality

In the course of qualifying a prospect, completing a financial questionnaire, analyzing needs, or working on an estate or business plan, insurance agents are privy to a client's personal and financial information. Ethics require that the agent respect the sensitive nature of this information and keep it confidential. Personal information about a client should never be released without proper approval from the client.

5. Full Disclosure to the Applicant

As has been emphasized throughout the text, insurance agents have a duty to fully disclose to the insurer all material facts concerning an applicant, policyowner, or situations involving both, to aid in any decision that the insurer has to make regarding a particular case. At the same time, an agent has the ethical responsibility of full disclosure to a prospect or client.

In this context, full disclosure means informing the prospect or client of all facts involving a specific policy or plan, so an informed decision can be made. Full disclosure allows the insurance agent to help the client:

• Select the most appropriate policy to meet his or her needs; 
• Understand the basic features of life insurance; and 
• Evaluate the relative costs of similar plans offered by a competitor. 

To assist agents with disclosure, there are published documents available to help the consumer understand the intricacies of a life insurance policy. Many agents use the forms not only as an educational tool, but also to help them in their sales presentations. These forms include the NAIC Buyer's Guide and Policy Summary.

The NAIC Buyer’s Guide

The Buyer's Guide was developed by the National Association of Insurance Commissioners (NAIC) as an aid to consumers who are contemplating the purchase of life insurance. Most states require that agents make the Buyer's Guide (or similar document) available when they solicit insurance sales. This guide explains life insurance in a way that the average consumer can understand. It speaks of the concept in general and does not address the specific product or policy being considered. Included in the Buyer's Guide is an explanation of the surrender cost indexes used in the Policy Summary.

The Policy Summary

The Policy Summary includes two types of cost indexes:

1. The life insurance surrender cost index; and 
2. The life insurance net payment cost index. 

The surrender cost index is useful to applicants who want to compares the death benefits of policies. 

The Buyer’s Guide and Policy Summary are especially helpful to agents who want to explain the features and benefits of the life insurance policy that they are presenting. These forms also provided needed guidelines for the comparison of two or more policies. 

Keeping the Applicant Informed

The underwriting process for an insurance application can be time-consuming. Most insurance companies strive to complete the process within a 21-day period, assuming that there are no delays. Delays can occur whenever an underwriter needs additional information from the applicant and relays that request through the agent, or when a counteroffer, different policy, or different rate is made to the applicant (again through the agent).

An agent's ethical responsibilities to his or her client during the underwriting process center around promptness and policy delivery.

Promptness

An insurance agent needs to ensure that there are no unnecessary delays in the underwriting process. Thus does not mean that the agent has to rush from an applicant's home to the nearest post office to mail an application. It does mean, however, checking the application for accuracy and giving careful thought to it before the application is actually submitted. Many underwriting delays occur simply because the application is not complete or is not clear.

Applications should be submitted as soon as possible. The time frame will vary, of course, depending on the plan of insurance and the complexity of the case. An agent must take these factors into account to act in an efficient manner. If it appears that the underwriting process may take longer than anticipated, the agent should notify the applicant of the delay.

Policy Delivery

Most policies are issued as applied for. In such cases, the agent owes his or her new policyowner prompt delivery of the policy and a review of its features and benefits. Not only does this help solidify the sale, it also represents a step toward making the policyowner a lasting client.

On the other hand, some policies will be rated or rejected. When this happens, the agent has two responsibilities: 

1. He or she personally reviews the rating or rejection. Was it medical? Was there an unfavorable medical report? Was something overlooked or not made known to the underwriter? Should additional information be submitted? Is the rating or rejection proper? Should the application be reconsidered? In any event, the agent should have as much information as possible and be able to explain the rating or rejection to the applicant. 
2. Assuming that the rating or rejection was valid, the agent has the responsibility to notify the applicant promptly. To withhold this information is a breach of ethics and could actually harm the applicant and his or her family. 

Special Situations

In most cases, an insurance agent needs only common sense to avoid an unethical situation with a policyholder. However, there are some specialized areas where the agent's ethical conduct is specifically detailed.

These specific ethical responsibilities are spelled out for agents active in estate and professional business planning. In these areas, the ethical guidelines are clearly defined by professional organizations chartered to monitor the activities of their practitioners.

Estate or Business Planning Insurance

An insurance agent who works in estate or business planning knows that the valuable plans and programs that he or she helps implement for a client are often the result of a joint effort with other professionals, such as attorneys and accountants. Typically, an insurance agent is the catalyst who, through analysis and planning, evaluates the client's needs, proposes a solution, and then brings together the professional estate or business planning team.

Unfortunately, the zealous activities of some agents have triggered serious disagreements with members of the legal profession. The American Bar Association has issued opinions regarding the ethical conduct of insurance agents and their advertising and sales presentations to prospects and clients in these areas.

The following is a summary of the American Bar Association's position regarding the legal role of an insurance agent:

Persons who are not lawyers can be active in areas of analysis of facts, the orderly arrangement of assets to provide for a client's needs while living, and for the economic needs of dependents after the clients death. Persons who are not lawyers may also provide general information as to the laws governing the disposition of these assets.

Persons who are not lawyers but who do legal research, give specific legal advice, draft legal documents, or apply legal principles to a client's specific situation are engaged in the unauthorized practice of law.

A producer should never dissuade a client from seeking the advice of legal counsel. It is improper for a producer to attempt to divert legal business from one attorney to another.

A producer must never share or participate in an attorney's fee. A producer must not pay directly or indirectly any part of his or her commission to an attorney or any other person who is not a producer.

The professional insurance agent understands that each member of the estate or business planning team serves a specific function. The attorney drafts the documents necessary to accomplish the client's objectives and advises the client of any legal consequences, while the accountant determines the accounting and tax implications and procedures. On the other hand, the agent recommends specific insurance policies or plans in an appropriate amount and ensures that ownership and beneficiary designations conform to the legal agreements prepared by the attorney.

The insurance agent understands that his or her ability to help meet the client's objectives depends on the involvement of these other professionals and encourages their participation.

Once the policy is issued and an applicant becomes a policyowner and client, service becomes more than ethical responsibility; service now forms the foundation in which the agent and client form a lasting relationship. All policyowners should receive periodic reviews to ensure that their insurance programs are in step with their plans and objectives. Service after the sale is more than a responsibility; it is part of a life insurance industry tradition. Agents through the years have helped build that tradition, and your future success as an agent depends on your continuing that tradition.

Ethical Responsibilities to the Public

The insurance professional has a great degree of control over the public's attitude toward insurance. This is because the agent initiates contact with a prospect, determines a prospects need for insurance, recommends and implements an appropriate plan, and continues a long-term relationship with after-sale service.

Because the agent has significant contact with the public and represents a primary source of insurance information, public perceptions of the insurance industry can be severely damaged by unethical agents. The professional insurance agent has two ethical responsibilities to the public:

1. To inform the public about insurance with the highest level of professional integrity; and 
2. To strive for an equally high level of professionalism in all public contacts to create and maintain a strong positive image of the industry. 

Public Obligation

Insurance plays a major role in the lives of most people in the United States. Property insurance protects homes and businesses from losses resulting from fire and natural disasters. Liability coverage protects individuals from losses resulting from accidents. Medical insurance not only provides a cushion against economic disaster, but in many instances it also helps to speed recovery because the patient does not have to worry about paying the bills. Lastly, life insurance benefits and cash values represent a substantial part of the financial holding and retirement plans of many people.

Considering how important insurance is and how it benefits our lives, it's surprising how many people just do not understand even the fundamentals of insurance. Given that some consumers remain ignorant about insurance, it's possible for unscrupulous agents to take advantage of these people by inducing them to buy policies that are unnecessary or do not live up to the promised benefits.

Many consumers feel that insurance is one area in which a wrong purchase is easy to make. The terminology is confusing, and the conditions and exclusions seem complicated. Further, it may not always appear that the agent is working in the consumer's best interest.

To combat this perception, the professional insurance agent must offer the public an honest and fair explanation of the policies and services that he or she represents. In addition, the insurance agent has to be dedicated to the principle of needs selling.

This means that the agent must clearly explain policy features and benefits without misleading the consumer or misrepresenting the policy and its benefits. And the professional insurance agent must be ready to back up his or her promises with solid performance, and encourage other agents to do the same.

6. A View from the Top

In 1990, the Ethics Resource Center conducted a survey of key ethical issues in the American insurance industry. Participating in the survey were the chief executive officers of top property-casualty companies (in terms of premiums written) and the top life insurance companies (in terms of insurance issued). Each CEO was asked to rate the key ethical issues facing their particular industry. In this "view from the top," these executives indicated that two of the most significant ethics problems are deceptive use of advertising material and deceptive sales presentations, both of which do great damage to the public's perception of the insurance industry.

Deceptive Use of Advertising Material

There are two indisputable facts about insurance and the buying public: 

1. The average insurance buyer knows very little about insurance and relies on the advice and recommendations of the insurance agent; and 
2. By the time a consumer finds that a particular policy does not meet his or her needs or does not live up to the agent’s promises, it may be too late to purchase another policy. 

The potential for deceptive advertising or promotion by companies and agents alike is significant, and the consequences to the consumer can be quite grave. Accordingly, all states have enacted laws regulating insurance advertising. The basis for many of these state statutes is the NAIC’s model Unfair Trade Practices Act, which expressly cites false advertising as an unfair trade practice and prohibits it. In this context, the term "advertising" is quite broad. It includes print and radio material, descriptive literature, sales aids, slide shows, prepared group talks, brochures, sales illustrations, policy illustrations, and TV commercials—in short, almost any kind of communication or presentation used to promote the sale of an insurance policy. 

The purpose of the NAIC model act is to established guidelines to ensure that insurance companies and their agents promote their products properly and accurately, without exaggerating the benefits or minimizing the drawbacks. For example, the act forbids any misrepresentations of the benefits, terms, conditions, or features of any insurance policy, including dividends. The act also bars any misrepresentation of an insurer's financial condition or its legal reserve system, and it prohibits names or titles of insurance that do not represent their true character.

Some states have enacted regulations that separately address life insurance and health insurance advertising. Life insurance advertising, for instance, cannot use the terms "investment", "savings", or "profit" in a misleading way. Health insurance advertising must disclose provisions regarding renewability, cancellability, termination, or modification of benefits.

Generally speaking, the burden of complying with state insurance advertising law rests on insurance companies because most advertisements or promotional pieces, regardless of the writer or presenter, are considered to be the responsibility of the insurer whose policies are being advertised. In practice, most of the advertising and sales literature that an agent uses is prepared by the insurer under the careful eye of its legal staff. For an agent, then, the ethical issue isn't necessarily the material itself, but instead how the material is used, and the deceptive sales presentation that may result.

Deceptive Sales Presentations

Deceptive sales presentations have probably generated more complaints of unethical agent behavior than any other activity. In addition to the life insurance CEOs in the United States, concern over this activity is shared by the National Association of Life Underwriters (NALU) and the American Society of CLU & ChFC, as well as by the Independent Insurance Agents of America. The topic has also been addressed by the U.S. Congress in committees studying insurance company activity.

What constitutes a deceptive sale? Any presentation that gives a prospect or client the wrong impression about any aspect of an insurance policy or plan is deceptive. Any presentation that does not provide complete disclosure to a prospect or client is deceptive. Any presentation that includes misleading or inconclusive product comparisons is deceptive. Even if the deception is unintentional, the agent has done the consumer a great disservice. 

Deceptive sales presentations can be blatant. For example, a comparison of a term policy and a whole life policy based only on premium rates is obviously misleading and incomplete. Yet, deception does not have to be so apparent to be unethical. What about describing a personal life insurance policy as a "tax shelter" but failing to mention that premiums are not deductible and that surrendered cash values may be subject to tax? What about recommending a certain kind of health policy without explaining the conditions under which it could be canceled or the premiums increased? While any of these ploys might help make the sale, they are all misleading and unethical. 

Policy Illustrations

Of all the companies surrounding the marketing and the sales of life insurance, none resonate so loudly as those over the use and misuse of policy illustrations. As insurance policies changed over the years, with the emphasis on the growth, return, and investment aspects of permanent plans; the "unbundling" of a policy's accumulation and protection elements; and the flexibility of premium payments, insurers and agents discovered that one of the best ways to demonstrate the complex mechanics of a policy was through the use of the computerized policy illustration.

Unfortunately, these illustrations have also been used to "predict" a policy's potential and its future performance based on assumptions that may or may not be realized. Vanishing premiums, huge cash values, in-force lifetime benefits -- all of these things have been extolled to sell a life insurance policy, without the explanation that they are based on nonguaranteed numbers projected into the future. What did not accompany these illustrations was an understanding on the part of the consumer that the values they were being shown would materialize only if the underlying assumptions came true.

Along with the changing dimensions and features of today's life insurance products comes a subtle shift in risk back to the buyer. The more flexible the policy, the more aggressive the assumptions and the more sensitive the product will be to changes in mortality, expense, and interest rates. However, this fact has been buried, ignored, or glossed over, intentionally and unintentionally, in too many sales presentations. Current and illustrative values have been spotlighted, and guaranteed values have been pushed backstage. In many sales situations, the policy illustration became the focus of the presentation (i.e., the illustration became the product).

The consequences of illustration-based selling became apparent in the early 1990s. Individuals who purchased life insurance policies in the mid-1980s (when interest rates were high) with the expectation that they would pay premiums for only seven or eight years found out that their policy's accumulated values were sufficient to "vanish" but were charged against the policy's value. Others who bought plans with the idea that premiums of a few hundred dollars a year would produce values of a million dollars by the time they were ready to retire discovered that they were far from their goals.

The experiences described above gave momentum to the charge that the misuse of policy illustrations has created a "crisis" situation in the insurance industry. Consumer groups, politicians, and journalists have declared that life insurance buyers are being misled by many in the insurance industry who abuse the use of policy illustrations and don't distinguish between values and benefits that are guaranteed and those that are not. For some agents and some companies, the allegations have led to lawsuits.

The problems associated with policy illustrations have compelled the industry to respond. Insurance companies are redesigning their disclosures to promote better understanding by consumers as to policy pricing, company and product performance, and illustration assumptions. They're instructing their agents to show illustrations based on a variety of assumptions, not merely those in which current assumptions prevail against the guarantees. However, perhaps the most significant initiatives, given their combined impact and reach, come from the NAIC and the American Society of CLU & ChFC. The NAIC has draft model legislation on policy illustrations, and the American Society has developed an illustration questionnaire to help agents understand the assumption that is used to designed and create sales illustrations.

7. The Role of Ethics

The term "professional status" implies long-term success, and with good reason. The qualities that make you a professional will also make you successful in your career over the long run.

The following are qualities of a successful professional:

• Performance of an essential service to society; 
• Command of specialized knowledge; 
• Possession of a tolerant attitude toward competition; and
• Adherence to high ethical standards.

Let’s look at each of these qualities.

Essential Service

Our society depends on insurance increasingly as a means of protection from financial disaster. Life insurance purchases continue to increase each year. There is a growing concern over health insurance coverage. Property insurance coverage forms part of every mortgage contract, lease agreement, and is often found in construction, service, and maintenance agreements. In some cases, Casualty coverages, such as auto liability and workers compensation, are required by law.

Insurance is an essential service in our society, and insurance professionals are instrumental in causing one or more of the following to happen, now or at some point in the future:

1. A policyholder dies, and his or her survivors are able to remain financially comfortable in their own home because life insurance provided the funds that were needed for both mortgage liquidation and living expenses. 
2. A couple enjoys a worry-free retirement because a fund begun years before by a timely life insurance policy or annuity made the money available at the right time. 
3. A young person is able to attend college or vocational school because someone made the timely purchase of a policy designed to provide the necessary funding in the event of the premature death of the family provider. 
4. The physical assets of a business are destroyed by fire or other peril but are quickly replaced, and people are soon put back to work earning their incomes because insurance against the occurrence of the event had been secured. 
5. The financial ruin of a policyowner following an automobile accident for which he or she may have had some legal responsibility is averted because he or she had adequate insurance to cover such occurrences. 

Specialized Knowledge

The insurance professional must have a thorough understanding of how the product works and how it meets the needs of the public. Agents must be able to analyze needs and recommend proper solutions. They must also be able to motivate people to take action. Home office personnel need to know how companies operate and how to provide necessary support to agents, policyowners, and management. Claims representatives need to understand the obligations of the parties to the insurance contract, as well as how to deal with people.

Tolerant Attitude Toward Competition

Agents should avoid criticizing other agents; such activity is detrimental to everyone in the business. Any criticism of other companies' policies should be avoided. An incomplete comparison is misleading and harmful to the public, and it can even result in the revocation of the license of the guilty party.

If you are asked to evaluate an insurance company's reputation, you should refer your questioners to one of the widely-respected insurance company rating systems. These evaluate each insurance company's financial status and look at reserves, underwriting, investments, and management, and rate the companies accordingly. Some of the most widely known and respected are AM Best Company, Standards and Poor's, and Weiss Rating, Inc.

In addition, some situations, such as the handling of death claims or a national disaster, call for insurance professionals to lay aside all thoughts of competition and join hands to provide the best possible service for the people involved.

High Ethical Standards

The most distinguishing characteristic of a professional is an adherence to high ethical standards. There are minimum legal standards that must be complied with in order to engage in the insurance business. However, professionalism implies more than just meeting these minimum standards. To be a professional, you must put your client's interest ahead of your own. Taking ethical shortcuts will impair not only your status as a professional but also your long-term success. In perhaps no other industry is the element of trust more important than in the insurance business. In the Journal of Insurance Regulation, "Ethics and Compliance in the Business of Life Industry: Reflections of an Ethicists," author Ronald Duska has this to say:

Massive changes in the insurance industry are encouraging enlightened leaders, particularly those in the compliance field, to become more ethically attuned to the needs of clients, agents, and other stakeholders. Compliance officers need to convey that their office does more than worry about the law, but rather is seen as driven by the overriding ethical concern for the good of the customer. An ethical perspective must overlay the compliance perspective, addressing three basic rules: fulfilling ones responsibilities, being fair, and doing no unnecessary harm. Attitudes reflected in the statements "If it's legal, it's moral" and "You can't legislate morality" mitigate against this goal, and reflect outmoded ways of thinking. To advance the theme that "Good ethics is good business," compliance officers can use reward systems, behavioral controls (external force), and ethical attitudes, reflected in the Golden Rule, "Do unto others as you would have them do unto you."

People like to do business with people you trust. Trust is built by ethical behavior. When people find a business person who has high ethical behavior, when people find a business person who has high ethical standards, they tend to do more business with that person. On the other hand, when they observe a business person acting unethically, they'll be reluctant to do more business with that person.

How to Incorporate Ethical Values in Life

While properly defining professionalism requires accuracy, everyone agrees that a high ethical standard is an integral part of the definition. What is required in order to live a more ethical life and develop a more ethically-based career?

Experts agree there are three fundamental elements: 

1. Commitment: The desire to do the right thing;
2. Sensitivity: An awareness of the ethical implications of situations that you face; and
3. Ethical Competency: Applying a decision-making process that has ethical principles as its foundation. 

While some people are committed to doing the right thing, others are committed to maximizing their income, increasing their pleasure, or avoiding difficult situations. There is often a price to pay for doing the right thing, especially in the short term. Leading an ethical lifestyle requires a strong commitment to doing the right thing

Every day, most of us walk past opportunities to improve the quality of our own lives and those of others with whom we come in contact. We often respond to situations automatically, the way we always have, or the way we see others respond. We fail to recognize the opportunities to "take the high road." 

We all need help in leading a more ethical life. If we are to build a quality life, we need some guidelines and practice in doing the right thing. That said, rules of thumb are not enough in a difficult ethical dilemma. 

Major Themes in Ethical Philosophy

Philosophers consider ethics to be the science of conduct, the fundamental ground rules by which all people live their lives. Philosophers have been discussing ethics for at least 2,500 years, since the time of Socrates and Plato. Many ethicists consider emerging ethical beliefs to be state-of-the-art legal matters. What becomes an ethical guideline today is often translated into a law, regulation, or rule tomorrow.

The following major themes run through all ethical philosophies. By reviewing these four themes, we soon realize that there may be another perspective to any position.

1. Concern for Self vs. Concern for Others 
2. Intuition vs. Rationalism 
3. Religious Teaching vs. Individual Authority 
4. Absolutism vs. Relativism 

Because people have different belief systems, none of us is in the position to judge another's motives. Some people take others into consideration when making decisions, believing that the decision should reflect the greatest good for the greatest number of people. Other people make their decisions based purely on their own happiness, welfare, or enjoyment. Their philosophy is "You take care of yourself, and I will take care of myself."

Some people adhere to religious doctrines that present what is right and what is wrong. They reference holy writings, revelations, or tradition to establish good behavior. According to that religion, each person should attempt to follow those traditions. Other thinkers, like Jean Paul Sartre (1905-1980), believe that there are no absolute values, that each person creates his or her own values and projects them onto the world.

Some people believe that certain actions are always right or good, without exception. Other people hold that "goodness" or "rightness" of actions depends on the circumstances.

The Challenges in Ethics

Sometimes, taking the most ethical path means that you will lose something else that is important to you. If we are to live an ethically based life, we must be willing to lose for the right reasons. The probability of losing is a test of your ethical courage. The willingness to lose for the right reasons is the price you pay factor (PTP Factor) for leading an ethically based life. People in positions of power, motivated to "win at all costs," often have great difficulty with this challenge.

There is often a price to pay for leading a more ethically based life; fortunately, in the long run, the rewards are also greater.