Module4

Professlonallsm lntroduction The insurance industry is one element of the massive canadian industry called Jinancial services. Financial services also include banking and the securities business. Like other financial services, insurance is closely monitored and subjected to stringent standards.

-\s an agent preparing to enter this industry, you must know

the

expectations for your conduct and the legal requirements by which r our activities will be scrutinized.

ln this module: LESSON 1= Professional Standards LESSON 2= Agent Licensing LESSON 3: The Law of Agency LESSON 4: Agent Conduct LESSON 5: Agent Misconduct LESSON 6: Errors & Omissions lnsurance LESSON 7: Ensuring Protection for Clients

The Canadian Life Insurance Course

Some Key Terms to Know actuul authority: the authority given to an agent to perform

effect.

certain tasks.

apparent authority: the implied or suggested authority granted to an

agent, even

failure to properly execute the steps of putting a policy into

if

this was not

the

intention of the principal.

Jiduciary relationship:

the

relationship between a fiduciary (someone having a responsibility

of confidentiality

and trust) and

his or her client.

errors and omissions insurance (E&O): professional liability coverage carried

by insurance

agents and insurers against lawsuits claiming mistakes in professional judgment, andlor

law of agency: allows a client to purchase

life

insurance without

direct contact with the insurance agency.

For all the key terms for this, and all modules, please see the Glossary at the beginning of the book.

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LESSON ONE: Professional Standards \rarious rules and regulations of the insurance industry form its professional stundards. There is a descending hierarchy that begins with the lawmakers and ends with the individuals who put the laws into practice:

How Standards are lmplemented

/ '

/

Federal

\

and provincial\

\ laws \

governments pass the

pertaining to the industry

Gourts interpret and apply the laws for implementation by the regulatory agencies

Regulatory agencies such as FSCO,transform the laws into rules for the industry

lnsurers

\

governed by the regulatory agencies and share certain standards for their actions and that of their agents

Agents whose actions are governed by the insurers and who are also guided by their personal ethics

\\hile you, as the agent, may be at the bottom of the triangle that describes the rrocess of making standards, you are at the forefront when it comes to :nplementing those standards. It is your responsibility to conduct yourself -',,

ith the highest degree of ethical behaviour.

The conduct of life insurance agents is controlled by various national and lrr--rr incial agencies and associations, federal and provincial stafutes and

legal precedence, and the codes and by-laws of provincial councils. In addition, the code of ethics established by the Canadian

=gulations, -:rsurance

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The Canadian Life Inswrance Course

Life and Health

Insurance Association (CLHIA) and various industry

associations provide guidelines for agent conduct.

While some examples of these codes and standards will be given, you should be familiar with those codes and standards of conduct that apply in your jurisdiction.

Your failure, as a life insurance agent, to adhere to the conduct guidelines that follow could not only expose you to errors and omissions insurance claims, but lead to serious conflicts with the regulating bodies of the insurance industry.

LESSON 2= Agent Licensing Agents throughout Canada are issued licences that permit them to sell specific

products, and although the exact nature of these licences is not uniform, they usually fall into one of the followittg categories:

c life

insurance,

or life

insurance plus accident insurance,

or life

insurance plus accident and sickness insurance

. o

accident and sickness insurance

all other classes of insurance

Provincial Superintendents of Insurance issue licences to applicants upon the following: receipt of written application with requisite fee

successful completion

of a

qualification exam

set by

the

Superintendent

satisfactory evidence that the applicant is of good character, and reputation, has a reasonable education background, and good record if previously employed satisfactory evidence that the applicant is acting in good faith and for pu{poses other than to simply insure himself herself or members of his or her family

Licence Term and Renewal Although they vary provincially, all provinces specif' a date on which all agents' licences expire.

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licences may be renewed for a one-year term by application and payment

to provincial Superintendents ofthe prescribed provincial fee.

Licences for Partnerships and Corporations Except in P.E.I. and Newforindland, licences listing the name of every party authorized to act as an agent are issued in the names of partnerships and corporations formed with the express intention of carrying on business as an insurance agent.

Generally, each corporate director or partner makes an application to be licenced in the firm's name.

If the partnership or corporation is wound up or ceases to exist, the members of the partnership or officers of the corporation must inform the Superintendent who will then revoke its licence.

The Superintendent also has the authority to suspend or entirely revoke the licence of a parfirership or corporation as an entity or any individual member, partner, or officer thereof.

If a person

ceases to act as an agent

for an insurer usually the insurer must give

written notification to the Superintendent including the reasons why the agent

left the firm. In some cases (e.g. Ontario) the agent must return his or her licence to the Superintendent upon termination of employment with an insurer.

has

The Superintendent may revive these licences

if

another insurer subsequently

employs the person.

Licence Revocation and Suspension Superintendents of Insurance have the authority following investigation to suspend or revoke an insurance licence for:

r o o

Violation of any provision of the Insurance Act or regulations Omissions or misleading information on a licensing application

Acts of fraud, incompetence or of an untrustworthy nature

-{ll provinces except P.E.I. and Newfoundland have advisory boards that deal u'ith complaints from agents or firms that arise out of a refusal by the Superintendent to grant or renew, or to revoke an insurance licence.

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The Canadian Life Insurance Course

LESSON 3: The Law of Agency The law of agency is essential when providing financial services.

It allows

an

individual or corporation to carryz on business and to be represented in many places at different times. Specifically in regards to life insurance, the law of agency means the client can purchase life insurance without direct contact with the insurance company.

The law of agency authorizes an agent to bring the insurance company (the

principal), for whom the agent acts into a contractual relationship with party (the insured). This relationship is binding on the principal.

a

third

The arrangement between the principal and agent is called the agency contract. Under the terms of this contract, the principal gives instructions to the agent and agrees to pay the agent on the understanding that the agent will follow the instructions of the principal. The agent then negotiates contracts with third parties on behalf of the principal.

It is often mistakenly thought that "agent" and "representative" have the same meaning. Regardless of the term used, the real issue is whether the person has the power and authority to bind someone else to a contract with a third party.

The definition of an agent varies provincially but several similar characteristics are uniform in its definition. An agent is generally defined as a person who

(for

consideration i.e. money) on behalf of someone else negotiates, solicits, and places a contract of insurance. Many of the provincial definitions refer to an agent's task as also including a component requiring delivery of the policy and the partial collection of premiums.

Be sure to understand the concept of agent authority and

what

it

means for

you,the

For example, an independent agent who represents a life insurance company may, in fact, be an agent of that company because he or she binds applicants to the company. An elected member of parliament who "represents" citizens an area is not their agent.

of

agent.

In most agency relationships, the agent is given authority to act on behalf of the principal by a written or verbal contract. Some specific frrnctions require written auithorization (e.9., to draw cheques in the name of the principal or insurer).

The authority bestowed on an agent in an agency contract comes in fwo forms: actual authority and apparent authority.

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Actual aathority is straightforward: an agent is given authority to perform certain tasks and is prevented from performing others. Appurent authority, however, can be a source of problems. In this case, the principal implies or suggests that the agent has been granted certain powers, even though this may not have been the intention of the principal. ^V.-B. When a client does not know

the'limitations on an agent's authority, the

principal will be bound by the agent's apparent authority, not actual authority.

-\s an agent, the expectations of you and the limitations on your actions will appear in the contract that exists between you and the insurer. This contract u'ill set out what the insurance company (the principal) has authorized you, as the agent, to do. Actual authority is what the principal has instructed you to do; apparent authority determines how you will carry out your actual authority.

Ihe lssue of Authority While completing an application for a whole life policy,

Ned

Bucolic asked Woodrow "Woody" Timbre, agent for Forked Falls

lnternational lnsurance Co., whether he should mention his recent visit to the doctor for "really bad indigestion." Woody said, "Don't bother. lf Forked worried about every stomach ache, they wouldn't be in the insurance business," Ned completed the application without the information. Within three months of being issued a standard rated policy, Ned died of a bleeding ulcer.

Forked sought to deny coverage based on Ned's failure to disclose the symptoms that lead to his visit to the doctor. Would they be successful? Probably not.

When Woody explained the question on the application to Ned and the explanation was incorrect, Ned was misdirected. He then answered the application question incorrectly. Forked may not be able to rescind the policy even though the application contained a material misrepresentation. ln this case, the company's liability to Ned was determined by the agent's apparent authority, not actual authority.

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The Canadian Life Insurance Course

Your contract as an agent for an insurer generally limits your actual authority to: the solicitation of insurance applications

collection of the initial premium the delivery of the policy

in such a manner so as to limit your apparent authority as the agent. This is important because apparent authority is the power that the insurance company implies has been given to you, the agent, and the company's liability to a third party (the client) is determined by your These contracts are drafted

Actual authority

is generally limited to three duties.

apparent authority, not actual authority. In general, the insurance company is not bound by your actions that fall outside ofthe scope ofboth your actual and apparent authority.

The Rights and Obligations in an Agency Relationship All the parties in an agency relationship the agent, the insurance company (principal), and the client (third party) have rights and obligations to each

-

other.

Rights and Obligations

lnsurer (principal)

Agent

Glient (third party)

Obligations between lnsurer and Agent The insurer must:

. .

pay the agent as agreed

indemniff (repay) the agent for all expenses incurred in the performance ofhis or her duties, unless they are independent brokers or agents.

lY.B. The agent must follow the instructions of the insurer.

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As long as you follow the instructions of the insurer, you will not be held responsible for any damages that may occur in carrying out your duties. If, however, you fail to carry out the instructions of the insurer, you may be liable

for damages that result. Moreover, the insurer is entitled to repayment by you for a loss that results from wilfully exceeding your authority. The insurer has the right to require you to repay them for any damages resulting from your negligence as an agent.

Obligations between lnsurer and Client lnsurer: The insurer is liable to a client for your authorized acts as its agent and for your unauthorized acts committed within the scope and course of your authorized services. An unauthorized act can fall within the scope of your authority when it is incidental to (or as a consequence of) some dctthatyou are or were authorized to perform.

In order to avoid such liability, the insurer may assert that you, as an agent, acted without actual or apparent authority, and that the company did not ratiff any of your unauthonzed actions. If this assertion is proven, a client who has suffered a loss due to your wrongdoing can sue you directly.

Even

if you do not

have the actual or apparent authority to bind the company

to your client, the company can grant this authority retroactively if certain conditions are met. If they are met, the company must rati$ the entire transaction that transpired between you and your client.

Client: The client will be liable for loss if he or

she intentionally defrauds the

insurer in the application.

It is unlikely that the insurer or you, as the agent, will sue a client for damages.

However, the client can expect his or her claim to be denied if information that he or she provided on the application that formed the basis for the policy was misleading.

Obligations between Agent and Glient \-ou, as the agent, are liable to a client when you have exceeded your authority. However, a client may sue you as the agent for damages when you rct for yowself and not on behalf of a principal (insurer). Accordingly, you should ensure that you make clear to your client that you are acting as an agent, and identif'the insurer.

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The Canadian Life Insurance Course

E&0 insurance is

necessarY for

liability arising from fraud

Agent liability can also arise from:

and

misrepresentation of coverage

these liability claims.

improper instruction in a claim failure to secure coverage failure to secure ProPff coverage error in calculation mishandling of funds failure to act in a timelY manner breach of confidentialitY

Accordingly, you must be diligent in providing the right advice. You must also act properly, ensuring compliance to regulations is followed at all times' Otherwise, you could be open to a lawsuit.

Limits on the Agent

The agreement between the agent and insurer generally, prevents the agent: from creating, changing, or discharging a contract extending a premium payment period incurring liability for the insurance company (other than liability that may be incurred by issuing a temporary

. e r

insurance agreement)

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LESSON 4: Agent Gonduct The conduct of a life insurance agent is evidenced by his or her ethics. Ethical

conduct means that you must conduct yourself in a manner that fosters a positive personal reputation for yourself, your agency, those insurers whom

tou represent, and for the insurance industry

\.8.

as a whole.

The ethical standards of a life insurance agent must exceed the legal requirements governing his or her conduct.

Ethical conduct is based on the principles of:

/ { /

knowing the client privacy and confidentiality

fittciary

dt;icy

Knowing the Glient S:curities regulators require their members to obey the know your client rule hich is manifested by the Know Your client forms that must be completed

";

:etbre an initial transaction, and thereafter on a regular basis. While insurance ;::.nts do not have an equivalent form, they are required by their Code of !:hics to follow the know your client rule.

l,r know your

client, you must:

monitor the client's needs document the relationship

!,fonitoring your client's needs should be done through periodic reviews that

-'i.e into account any change in your client's financial situation. In addition, ::=ctir-e client monitoring entails: delivering the policy to your client in a manner that reinforces the value ofthe insurance purchased premium follow-up by reminding your client when the premiums are due

policy owner service by maintaining contact with your client on an on-going basis

\"8.

-.\n agent can be confident that he or she has put a client's interests first

if

he or she makes the same recommendation to the client that the agent

u ould apply to him or herself in a similar situation.

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The Canadian Life Insurance Course

Documentation of your relationship (that is, keeping accurate records) with

your client is essential. It will not only provide you with the basis for which decisions were made, long after that thinking may have been forgotten, but will be invaluable in case your client becomes dissatisfied with the results.

Keeping accurate records of all of your business dealings with your clients, including any services provided by others, is considered due diligence.

Preventing Problems

Effective client monitoring can prevent many problems that an agent is likely to encounter such as: alapsedPolicY dissatisfactionwith investmentperformance mistakes on application forms

' . o

The purpose of documentation is to protect you and your insurer in the event that your client questions your advice or conduct, or takes legal action against

you.

In this case, you must be able to reconstruct the details of your

interactions with your client from a comprehensive electronic or paper trail, and to demonstrate due diligence.

An agent should keep a record of all of the following for each client: . conversations Documentation ' meeting agendas o instructions received verbally or in writing from

. o . o . o .

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the client information given to the client instructions and information given to third parties about the client

electronic communications, such as e-mail all transactions checklists correspondence

Module

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: Professionalism

Privacy and Confidentiality Personal information collected from clients is very sensitive and must always

be protected and used properly. This information generally deals with their

financial affairs and health history and, although usually collected directly trom clients, it also may be obtained from third-party sources, including la*yers, accountants, or doctors, with a client's authorization.

Personal information is protected in all of Canadaviathe Personal Information

Protection and Electronic Documents equivalent. Legislation ensures, given, that such information

Act (PIPEDA), or its

provincial

if written consent of the client has not been

will only be used for the purpose for which it was

supplied.

The national guidelines of the Canadian Life and Health Insurance Association

iCLHIA) state that personal information should only be disclosed: if the individual gives his or her consent if disclosure is required by law if the information is reasonably necessary to determine eligibility to protect the insurer against fraud or misrepresentation

if the information is disclosed in the discharge of a public duty \-ou. as an agent, are forbidden from using any client-related confidential rrtbrmation for your benefit or the benefit of a third person, or to the :isadvantage of the client.

Fiduciaries are bound by

u

higher

standard of ethical conduct than nonfiduciaries.

Fiduciary Duty \-ou have a fiduciary duty (that is, a responsibility of confidentiality and trust) to your client because you have greater knowledge and expertise about rnsurance matters than your client.

\\hen a fiduciary duty exists, there is said to be a Jidaciary relationship benveen the parties. An insurance agent and client is one example of a iduciary relationship; others include a lawyer and client, physician and ratient, bank and customer

-

even, a parent and child.

\s a life insurance agent, you act in a fiduciary

capacity for a client when the

"'lient places confidence in you and expects you to act for his or her benefit. As

r

fiduciary, you have a legal responsibility for the welfare of your client in respect to the services you provide.

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The Canadian Life Insurance Course

The fiduciary relationship between a life insurance agent and a

t"":t

":t5ffH";"ds

on the information suppried by a

rife

insurance agent The Agent and-Clien-t

. affairs of the client must be kept confidential at all times . a life insurance agent is bound by professional as Fiduciaries standards, including ethics a life insurance agent has a duty to advise fully, honestly, with care, skill, and in good faith a life insurance agent must keep meticulous records of all undertakings on behalf of the client

Activities Demanding Highest Ethics There are two duties as an agent in which the highest moral behaviour are expected

,/ ./

-

degree

of ethics

and

both by the insurer and the client. They are:

the completion of the application cost illustrations used in the selling process

Completion of the Application Both the applic art and you, as the agent, must be very careful when completing, reviewitg, and signing the insurance application. The applicant is responsible for the answers when you record the applicant's responses to the insurance application questions and the applicant subsequently signs the application.

Also, if you record the information incorectly, and the applicant fails to correct the false responses and signs the application, the applicant is responsible because the insurer can rescind the policy or deny a claim on the basis of material misrepresentation. However, you, as the agent, and/or the

insurance company

will be

accountable

in

cases where

the applicant

is

illiterate, a minor, or someone whose first language is not English or French and the agent fails to record correctly the responses of the client on the application.

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Module

Srr. e\'â‚Źn though the applicant has great responsibility

4

: Professionalism

for the application, you

a duty to complete the insurance application accurately, since the life rnsurance company may be liable for damages caused when you do not :rf,\'e

:11-'perly record a

client's answers on the insurance application.

lhe

concept of constructive notice presumes that your knowledge regarding ::re applicant will be passed on to the insurance company. However, if you

knorvingly record incorrect answers on the insurance application, the insurer r ill not have accurate andlor complete information, and the concept of : -,:lstructive notice

will no longer apply. In addition,

constructive notice

will

not have occurred if:

your actions constitute a fraud on the company you and the applicant conspire to conceal material facts; and

you know that the applicant has misrepresented a material fact in a situation where you do not pass on this knowledge to the insurance company

\-ou must also act in a timely manner during the application and underwriting Frocesses. The health of a proposed life insured may change quickly, and such ,'hange may result

in an increased premium, or the refusal of the insurance

.ompany to issue

policy.

a

Completing the Application

for Insu

rance

When completing and accepting an insurance applicatioh, the agent should ask all questions of the applicant fully and completely, making certain to explain any terms that the applicant does not understand.

The applicant's answers should be fully recorded on the application, and each answer should be reviewed with the applicant for accuracy and completeness before the applicant signs the form.

Cost lllustrations Cost illustrations are point-of-sale tools used to illustrate hypothetical policy

:ii

life insurance products that are not -r.rranteed. If improperly used, they may lead a client to expect unrealistic :n idends, guaranteed dividends, and/or other investment benefits. \ccordingly, the CLHIA has developed guidelines for the use of these idends and other benefits derived from

,-lr:strations that protect the agent and the client.

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The Canadian Life Insurance Course

These guidelines require that:

cost illustrations should use a consistent and realistic interest factor

premium and non-guaranteed benefits should use the current interest rate

agents must be trained

to explain the current interest rate factor in

a

sales illustration

the illustrations should contain appropriate disclaimers to clearly indicate the benefits that are not guaranteed

all terminology used must be clear and consumer friendly.

Where guaranteed values or features are present, they must be clearly indicated. In regards to performance figures that are not guaranteed, it must be clear that figures are given for illustration puq)oses only and that actual results

may vary. These figures should be presented as two examples of results: one example, or "primary" example, should be the best estimate, and the second example should present less favourable results.

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ln addition to

fraud,

misconduct

usually centres on seven

LESSON 5: Agent Misconduct

prohibited activities.

Misconduct of agents usually centres on the following activities:

/ / / / / / /

holding out tted selling misrepresentation commission splitting replacement

conflicts of interest unfaw trade practices

Holding out Holding out refers to how you, as an agent, present yourself to the general public. Individuals must obtain a licence before they can sell life insurance.

You can be held out or identified as a licenced life insurance agent once a licence has been obtained.

-\s an agent, you must meet a variety of requirements that address the issue of holding out as it relates to advertising, business names, letterhead, and business cards.

Frovincial and federal legislation and regulations, as well as guidelines from tlderal and provincial associations, play a significant role in governing how lite insurance agents in Canada can be held out.

For example, the CLHIA guidelines provide that before the buyer signs an rpplication for a life insurance policy (other than a variable policy), he or she ;an receive, on request, a copy of the CLHIA Guide to Buying Life Insurance rnd a policy financial summary. An appendix to the guideline lists the minimum information that must be included in the policy summary.

\-ou should understand the requirements in the province in which you practice lor rvhat you must disclose to a client or potential client. Disclosure is typically ::quired for:

the name, in writing, of the insurer(s) the agent represents or the insurer who will be issuing the policy the commission the agent will receive from the insurer for placing the policy (the amount of the commission does not have to be disclosed) the names of all insurers and other financial service suppliers that are represented by the agent for new, renewal, or replacement policies 4-17

The Canadian Life Insurance Course

how to cancel a policy, how to redeem or suffender a policy prematurely, and the cost for

a

policy with a cash suffender value

Tied Selling Tied selling occurs when a financial institution requires the client to transact other business with the institution as a condition of doing business; for example, if a financial institution required a client to buy life insurance as a condition of receiving a personal loan, that institution would be guilty of tied selling. Tied selling is prohibited.

Money Laundering and Terrorist Financing

Money laundering moves money that has been gained illegally into the

lt conceals the criminal source of the funds, and the transformation of those funds or assets into a legitimate form. economy.

similarly, terrorist financing depends on both criminal and legitimate methods to fund and transfer money. Terrorists tend to work with smaller amounts, making them even more difficult to track.

As an agent, there are red flags you should watch for in respect to money laundering and the purchase of products including universal life, segregated funds, mutual funds, annuities, and GlCs. Some of these include: people who are vague about their backgrounds and reluctant to provide adequate information when purchasing financial products products purchased with cash or cash equivalent in amounts

-

slightly less than $10,000. using wire transfers from unrelated third parties or foreign sources clients who purchase a product regardless of cost, commissions,

knowledge

of the

product's performance,

or

whether the

transaction holds little economic gain for the client

lnsurers, like other members of the financial services industry, are bound by the Proceeds of crime (Money Laundering) and rerrorist Financing Act.

All

suspicious transactions must

be reported to

FINTRAC, the

Financial Transaction and Reports Analysis Centre of Canada.

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: Professionalism

Misrepresentation You, as an agent, must take care not to misrepresent the terms or advantages

of

policy during a sale. In provinces where a code of conduct or by-laws of an insurance council cover agent misrepresentation, agents are subject to

a

sanctions and restrictions. These sanctions can range issuance

ofa

from fines and the

cease and desist order by the Superintendent oflnsurance, to the

loss of, or limitations on, an agent's licence and/or a requirement that an agent

perform whatever remedial action the Superintendent deems necessary.

\.8.

Agents must realize that

if

they misrepresent information, any loss suffered by their clients as a result of that misrepresentation could be

their responsibility.

If a lawsuit is initiated,

the litigation process permits the transaction between

the insurer, you, as the agent, and your client to be examined in detail. Your

;onduct must hold up under a detailed inspection. For example, you can be liable for misstatements made at a seminar if audience members rely on those statements and suffer negative consequences.

In addition, the federal Competition Act makes it a criminal offence

rn

advertisement

if you use

to promote a product or service that contains false or

misleading statements or representations to the public. You must refer to your

rror-incial insurance act or your provincial insurance council to understand :rohibitions relating to advertising. Nationally, the Advocis Code of Ethics for rgents stipulates that members must not use advertisements that refer to their ..lles results or membership in some club or organization that is based on sales ', rrlume. This prevents you from advertising yourself as a "leading agent."

Hou.ever, life underwriters can indicate on letterhead, business cards, and -lnnouncements that they have achieved Million Dollar Round Table status.

Commission Splifting l:r some provinces, you as a licenced life insurance agent, are prohibited from sharing commissions with anyone other than other licenced agents. Rebating, a :.-,mr

of

sharing commissions, has recently been allowed

in

some Western

::rrvinces. An agent can pay a third party finder's fee for providing prospects ,-,: leads,

but the fee paid must be a fixed amount per prospect or lead. The fee

.,lnnot depend on the commission amount generated as a result of sales.

\.8.

An agent can pay a fee for prospects as long as the fee is a fixed-dollar amount.

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The Canadian Life Insurance Course

In addition, you can pay a consulting fee of a given amount per case (or per hour ofconsultation) for services rendered. Again, the fee cannot be based on commissions, unless the consultant is also a licenced life agent.

Replacement Replacemenl is a term used to describe the act of surrendering an insurance

policy or part ofthe coverage of an insurance policy in order to buy another policy.

During the replacement process, you must ensure that the replacement is in the client's best interests and that you do not misrepresent the new policy or make an incomplete comparison between policies. This is accomplished, in part, by

providing the client with a standard disclosure statement that compares all the features of the existing policy with those of the proposed replacement policy.

clients will then be able to properly compare the premiums, cash values, extent of the coverage, and tax implications. In addition, a full and accurate disclosure will enable the client to determine if a replacement is in his or her best interest. The standard disclosure statement, when signed by the client, must be sent to the insurer of the existing policy within three business days.

Laws aimed at controlling replacement of life insurance are designed to prohibit churning and twisting . Churning occurs when you, as the agent, seek to replace an in-force policy with an existing insurance company with a new policy from the same company, primarily for the purpose of generating a new commission. Twisting occurs when you induce a policyholder to surrender or lapse a policy with one insurer and replace it with another insurer, to the detriment of the policyholder.

Some

jurisdictions state that the replacement rules do not apply when: the new life insurance contract is made with an insurance company with which the applicant has an existing life insurance contract the contract being replaced is an annuiry

group insurance replaces an individual contract

or an individual

contract replaces group insurance the contract replaces creditor insurance

The code of ethics for life insurance agents prohibits agents from engaging in unfair and deceptive practices, including "engaging in the indiscriminate replacement

of life insurance contracts, or adopting as a sales strategy,

plan involving the indiscriminate replacement of life insurance contracts."

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f Iodule 1: Prcllc-tsioru oIisrn

\\henever replacement is appropriate, the new insurer must issue the neu' policy as soon as possible once the application has been accepted to pre\-ent Bn)' gaps in coverage when the old policy is surrendered or has lapsed. if an insured wants to cancel an existing policy before the new policy is issued and consequently lack coverage for a period of time, it is recommended that vou. as the replacing agent, document this request by confirming the intention o :Lre insured in writing.

trrr*,

gu$nr

.:r

urnrw.

:ir

ls Replacement a Good ldea?

EareerCohse

,diiis8s. n.arz:df;|lfe bus inessca

,t. "

re

erc ollege.

D

The following should be considered when thinking oIl'y* a policy: o the new contract will attract new first-year charges and. consequently, may have reduced surrender values for several years o suicide and incontestable provisions begin anew o the prospect will be older and health may be declining so premiums will be higher o loan guarantees (and other guarantees) available on older policies may not be available on contemporary products . the older policy may have preferential tax treatment

Scnflicfs of lnteresf

\ conflicting

interest is an interest that would likely have an adverse effbct on

-, -xrllr judgment,

advice, or loyalty to a client or prospective client. As the .aSLrf&rce agenL you must disclose all actual or potential conflicts of interest

:glating to an insurance transaction or your recommendations to a prospective ..:e insurance buyer.

A Clear Conflict Jean Pastel, an agent with Sempra Fidelity lnsurance Company,

has come to meet with her old friend, Donna Petty, about Donna's proposed life insurance policy. Jean has presented the benefits and drawbacks of a 10-year renewable and convertible policy to Donna. Donna likes the features of the policy and its low cost premiums. Donna and Jean complete the application, ensuring the accuracy of all information. During this process, Donna states she wants Jean named as sole beneficiary of the policy "to say thank you for being such a good friend."

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com

-.-,,

The Canadian Life Insurance Course

lf Jean allows herself to be named as beneficiary, she is clearly in conflict of interest since she has sold the policy to Donna and will receive a commission on the sale. To extract herself from this conflict, Jean must ensure Donna does not sign the application but that it is destroyed. Another agent must step in as if Jean was never involved and present all the details of appropriate insurance products to Donna. Then, when a policy is being applied for, the agent must explain the significance of the beneficiary to Donna and Donna can name whomever she chooses.

Unfair Trade Practices unfair trade practices are the use of coercion, premium rebating, and gifting to clients.

You must not use coercion, also called undue influence, to obtain lnsurance business or to intimidate anyone from taking an action to which he or she has a legal entitlement. You are also prohibited from threatening to start any legal actign against a person where this threat is intended to stop the person from ntaking a complaint against you under provincial legislation or association bylaws.

Provincial legislation and association by-laws prohibit premium rebating in most provinces. Although rebating usually occurs when you, as an agent, offer to pay all or part of the premium required by the policy, it may also involve a gift, promotion, or inducement to'individuals to encourage them to make an

application for insurance. customer gifts of nominal value, such as free calendars or pens, are permitted, as long as such gifts do not hinge on the recipient buying life insurance.

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&.*

Module 4 : Professionalism

LESSON 6: Errors & Omissions lnsurance Insurance agents and carriers are lrrlnerable to lawsuits claiming mistakes in professional judgment, and/or failure to properly execute the steps of putting a

policy into effect. Within the insurance industry, this type of professional liability is covered by errors and omissions (E&O) insurance.

Successful E&O claims against agents or companies need no longer concern the consumer since those claims are now satisfied (up to certain policy limits) bv the E&O insurance carrier.

\.,B. E&O insurance protects consumers, agents, and insurers from issues arising from mishandling of funds, improper disclosure, etc.

-Tust

as the consumer can be satisfied that a claim against an agent or insurer

ill

be made good by the E&O carrier, so too can agents and insurers be

"r

ct-rnfident that they

will

be protected against settlements.

Direct contact between a consu(ner complainant and the E&O insurance carrier

only after the consumer asserts an E&O claim against an agent andlor hrs or her company. The parly against whom the claim is made puts his or her E&O insurance carrier on notice of the claim. It is at this point that the E&O ,-,CCUrS

:nsurance carrier oosteps into the shoes" of the party against whom the claim

::s

been made. The insurer investigates the claim and deals directly with the

;iaimant to settle or litigate the claim on behalf of the agent or company being .'.]ed.

As an agent, attention to detail at the time of sale and delivery of the policy '"',

ill

go a long way to minirnize the likelihood of an errors and omissions claim

"gainst ,:1r

you. The details of all contacts, whether in person, by telephone, e-mail

any other means should be documented. Consistent failure to do so may

::sult in discrepancies between you and yow client that could provide the basis :or a court decision against you.

\.8.

Remember that the agency relationship between agent and insurer may

implicate the insurance company in a claim brought against an agent.

This may arise when the agent appears to be acting with apparent authority or actual authority of the insurer and when information possessed by the agent is deemed to be in the possession of the insurer.

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The Canadian Life Insurance Course

You must not oversell the policy, nor fail to point out policy exclusions. you must take care when explaining when coverage begins, and what effect a temporary insurance agreement (TIA) has on your client's coverage.

Great care must be exercised to ensure that the insurance application has been

fully and accurately completed, and reviewed with the client. when changes are made to the application, you should ensure that the changes are acknowledged and initialled by the applicant.

When delivering

o r .

a

policy, you must:

carefully review and explain the coverage in the policy point out any non-standard premium charges explain any probationary periods and pre-existing condition exclusions in the policy

If

required by the insurer, you should obtain a statement of continued good health from the client, and point out the ten-day rescission period in which the policy may be cancelled and the premium returned.

Most jurisdictions provide protection from fraudulent acts of insurance agents through their errors and omissions insurance requirements. In ontario for instance, in addition to the required $2 million aggregate coverage for errors and omissions, every agent must have extended coverage for fraudulent acts.

These steps may assist agents in avoiding rawsuits brought by clients alleging agent negligence:

.

.

Preventative Measures . . o o

agents must not give advice they are not qualified to provide an agents' advice must be well-reasoned and documented agents should not be hurried into providing advice if necessary, agents should qualify their advice in wdting agents should verify all mathematical calculations when problems arise, agents should consult with colleagues

.

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agents should hone or sharpen their written and oral communication skills to achieve simplicity and accuracy

Module

4

: Professionalism

LESSON 7: Ensuring Protection for Clients Legislated Protection

Life

insurance contracts by their very nature give rise to long-term implications and generate extensive and genuine public interest. Accordingly, supervision

of the industry

exists under both federal and provincial

iurisdictions.

Federal legislation monitors the financial viability of federally-registered .rrmpanies for the protection of policy owners. Regulators track the sufficiency trl reseryes to meet the obligations of the insurance companies as they become due. They also enforce the laws that specifu the proper types and amounts of lnvestment allowed for insurance company funds. They determine the basis

lpon which assets are valued and shown on each company's annual financial ):atement and in the returns frled with the office of the Superintendent of Financial Institutions.

Provincial legislation and regulation concerns itself with various aspects of ::ie insurance industry. It deals with the terms and conditions in insurance :'-'ntracts, licences insurance agents, supervises provincially-incorporated ::'mpanies and monitors the financial viability of provincially incorporated :,:'mpanies. In some jurisdictions, agent licensing and conduct issues are

to

insurance councils composed of representatives from the ::ovincial governments, insurance companies, and individual agents. ::le_eated

?:.-rvincial regulations establish the necessity for, and the minimum :lquirements of, errors and omission insurance for all licenced agents.

ustry-Sponsored Protection r, ssuris (formerly called CompCorp) is an industry-sponsored, non-profit, :c.ierally incorporated, consumer protection plan for policy owners and

il

nd

: jrchasers of related products.

-: a member

its clients (i.e., becomes the obligations of that company by providing

insurance company is unable to pay

:.strlr-ent), Assuris assumes

:":,licv owners with continued annuity payments, cash surrender payments, and --,,nours life and health insurance policy claims. Assuris honours all of these :,,::ms up to specified limits for each type of payment or claim.

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The Canadian Life Insurance Course

Key Assuris Points ( Formerly known as Gompcorp) Consumers are protected in

their insurance investment, just as their bank deposits are covered

to a limit by Canada

Deposit lnsurance Corporation

Life Insurance: l00oA coverage up to $200,000, 85% of the total when the coverage exceeds $200,000 but never less than $200,000 when the

total exceeds $200,000.

(cDrc).

Annuities, disability income policies, long term care policies: I00% coverage up to $2,000 per month , 85o of the total when the coverage exceeds $2,000 but never less than $2,000 when the total exceeds $2,000.

Health Benefits: (CI, travel insurance, extended health , major medical) For each category of coverage, total health expense benefits are fully covered up to $60,000.

If total benefits in any category of coverage

exceed this amount, the coverage

is 85% of the total but not less than

$60,000.

Cash Value:

(Life insurance CSV, UL account value, segregated funds) -

For each category of coverage, coverage is $60,000 of the total. If the total values exceed this amount, coverage is 8 5% of the total, but not less than $60,000. For tradtttonal whole life cash values and IJL account values, coveruge is applied at time of death or surrender. For segregated

fund values coverage only applies on contracts that contain the death and

maturity guarantees and coverage extends to the guaranteed amounts only.

Accumulated Value Coverage: (accumulation annuities, RRIFs, IJL Side funds, premium and dividend deposit accounts attached to a policy these categories include GIC fype

products) For each category of

coverage, total accumulated value benefits are fully covered up to $

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100,000 only.

-

Take time

to

memorize all these key

points; you may find some of them 0n the exam.

Module

4: Summary of Key Points

The law of agency allows an agent to draw a contract between an insurer and the client in an arrangement called an agency contract.

All three parties agent, insurer, client

have

obligations to each other.

The actions of the agent are governed by the actual authority given to the agent by the insurer in which the agent is authorized to do certain tasks.

Apparent authority is when the insurer appears to have given the agent authority outside the limits of his or her actual authority. lf the agent acts with apparent authority, the insurer is still bound to the insured by the agent's actions and the insurer may seek damages from the agent.

There are three principles of ethical conduct for agents.

An agent has a fiduciary duty to his or her clients to act in their best interest.

Agent misconduct occurs through

misrepresentatioh, commission splitting, replacement (i.e. churning, twisting), unfair trade practices and conflicts of interest.

Penalties for agent misconduct include suspension and/or loss of licence, fines, and criminal prosecution.

E&O insurance protects agents, insurers, and clients. All agents must also carry extended coverage for fraud.

Assuris (forrnerly CompCorp) fulfills the claims obligations of an insurer that becomes insolvent to specified limits.

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