Life and Health Insurance License Preparation CourVe … · It is much like the Motor Vehicle Code...

Life and Health Insurance License Preparation Course

South Carolina State Law Supplement

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South Carolina State Law ….

Is a Whole New Ballgame

PART 4: SOUTH CAROLINA INSURANCE LAW

CHAPTER 19

©2012 Sagamore Training Systems LLC

WINNING THE STATE LICENSING EXAMGAME...ON YOUR VERY FIRST ATTEMPT

The South Carolina Life, Health and Accident Insurance Agent/Broker Exam is composed of 150 questions. You have just completed the general knowledge section which accounts for 120 of those questions and are mov-ing on South Carolina State Insurance Laws and Regulations, which ac-count for about 30 questions on your exam.

You will discover that the information contained in the State Law Chap-ters is entirely different from what you encountered to date. Likewise, the questions covering this material on the State Law section of the exam will require you to know this content in a significantly different way. For the same reason that you would not show up for a tennis match in a football helmet, your study methods and preparation for this portion of the exam should be based upon a different strategy altogether.

What’s the difference? Well, the general knowledge questions tend to focus on your understanding of the insurance concepts and products that you have studied. How does the Law of Large numbers make insurance possi-ble? How does coinsurance affect a claim? What is the purpose of a deduct-ible? State Law is little more than rote memory. It is much like the Motor Vehicle Code section of your Driver’s Test: What is required when you

GENERAL SOUTH CAROLINA INSURANCE LAW

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encounter an octagon shaped sign? How many feet does it take to come to a full stop when traveling 60 miles per hour? The information is not difficult; it does not necessitate any deep understanding on your part. It is merely a collection of facts, but facts that you must know by heart. Most of us have forgotten that it takes 160 feet to stop from 60 miles per hour, but we knew that little nugget of information when we sat for our driver’s test. We put in the effort, waded through the facts and committed them all to memory. Even the agonizing pressure of taking an exam that would determine our whole future (at least in the minds of teenagers) could not erase the critical data from our hormone-charged, pubescent brains. You must know the State Law content of your licensing exam in the very same way.

Now the good news, and the secret to winning the exam game. To obtain a Life, Health and Accident license, you must correctly answer about 120 out of 150 questions (70%). If you can respond accurately to all 30 South Caro-lina Law questions, you need only answer another 75 questions correctly to earn your license. That is 75 out of 120, which is only 63%. Said another way, if you are a bit shaky on some of the general knowledge info, you can greatly improve your odds of passing by nailing the State Law questions. Now for the really good news! There is but one factor that will determine your success on the State Law part of the exam…effort. Neither the person with the high I.Q., the guy who is a great test-taker nor the woman with the extensive insurance experience has any real advantage at this juncture. This is memory work. It is not fun; it is not exciting; it is not even particularly interesting. It is work. But, if you willingly put in the required work, if you can score 28, 29 or even 30 points on State law, you can almost guarantee your success in passing the entire exam on your first attempt.

OVERVIEW

Insurance is a state-regulated industry. In South Carolina, the Department of Insurance (DOI) is charged with the responsibility for enforcing the insurance laws passed by the legislature and is therefore part of the execu-tive branch of our state government. However, the DOI does have some quasi-legislative and quasi-judicial responsibilities. No, the DOI cannot pass laws and the Director of the Department of Insurance (DDI) – sometimes referred to in the legislation as the Chief Insurance Commis-sioner – does not wear a black robe or carry a gavel. But the Director can issue rules and regulations that Producers must follow, and the Department can conduct hearings and levy administrative penalties like fines or revo-cation of your license.

Two words will pop up often in this section – notice and hearing. These two words assure you of due process under the law. Since the time of the Magna Carta, it has been unlawful for the government to seize your

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property without due process. Now, when you first obtain your insurance license, it will be just a piece of paper. But three years from now, if you are earning $100,000 a year with that license, it will probably be the most valuable piece of paper in your wallet. If the Department believes that you have violated an insurance law, they cannot simply seize your license. You must be given notice and informed of your right to a hearing. That is due process.

You cannot legally transact the business of insurance in South Carolina without being in compliance with the laws, rules and regulations of this state. While most violations of insurance law carry an administrative pen-alty, any willful violation can be considered a crime. (Now we’re talking about a real judge!)

POWERS AND DUTIES OF THE CHIEF INSURANCE COMMISSIONER (a.k.a. the “DDI” or “Director”)

The Commissioner – also known as the Director of the Department of Insurance or the DDI – is the Big Cheese, the top dog for insurance regu-lation in South Carolina. He or she is appointed by the Governor with the advice and consent of the Senate, and serves at the will of the Governor, which means there is no specific term. Before taking the job, the Commis-sioner must sever all connections with insurance companies (except per-sonal policies) and put up a personal bond of $50,000 against any unlaw-ful or wrongful actions. A Commissioner who decides to run for political office must first give up the Director’s job.

The Commissioner has broad powers to enforce South Carolina insurance laws and protect the public good, including:

• Issue subpoenas• Conduct investigations and hearings of insurance companies and

any person or agency that holds a license• Written notice of a hearing must state the purpose of the inquiry

and be delivered at least 30 days before the hearing

There is more. The Commissioner regulates everything to do with insur-ance –the companies, the product requirements (to some extent), and the people like you who sell and service insurance policies to make the whole system work.

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Regulation of Insurance Companies

Certificate of Authority

It’s not easy to earn the Certificate of Authority to transact insurance busi-ness in the state. First, a company must prove to the Director of Insurance the following items:

• The insurer is duly qualified to transact business under the laws of the State.

• The insurer has filed with the DDI an affidavit of its president or other chief officer that it has not violated the South Carolina Insur-ance Code in the past year and that it accepts the terms and obliga-tions of this title as part of the consideration for license.

• The insurer pays all taxes and performs all duties required by law.

• The reserves of the insurer are adequate for the protection of poli-cyowners of the State.

• The insurance company’s Directors and officers are competent, trustworthy, and have a good business reputation and that the Directors and Officers have not been convicted of a crime in any jurisdiction involving fraud, dishonesty, or like moral turpitude or convicted of violating an insurance statute of any jurisdiction.

• The insurer has employed one or more persons residing in this State with adequate experience and training to manage properly its business and affairs.

• The insurer has not entered into any management contract, agency agreement, or other agreement which may materially affect its fi-nancial condition so as to render its proceedings hazardous to the public or to its policyowners.

• The insurer has made adequate reinsurance arrangements if re-quired.

• The insurer’s proposed method of operation, when considered in light of its financial condition and the absence of any prior operat-ing experience, will not likely render its proceedings hazardous to the public or to its policyowners.

• The reserve basis to be used by the insurer will be adequate for the protection of policyowners in this State.

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Solvency

The DOI wants to know if the insurance company is solvent before grant-ing the Certificate of Authority, and to keep it. Here are some of the issues the DOI looks at determine the financial soundness of a company and, by implication, its ability to serve the public interest:

• Adverse findings reported in financial condition and market con-duct examination reports;

• Reports from the National Association of Insurance Commission-ers (NAIC) Insurance Regulatory Information System

• Ratios of commission expense, general insurance expense, policy benefits, and reserve increases of annual premium and net invest-ment income which could lead to an impairment of capital and surplus;

• Whether the insurer’s asset portfolio, when viewed in light of cur-rent economic conditions, is of sufficient value, liquidity or diver-sity to assure the company’s ability to meet its outstanding obliga-tions as they mature;

• The ability of an reinsurer to provide sufficient protection for the company’s remaining surplus after taking into account the insurer’s cash flow and the classes of business written as well as the finan-cial condition of the assuming reinsurer;

• The insurer’s operating loss in the last 12 months – or a shorter time – including, but not limited to, net capital gain or loss, change in nonadmitted assets, and cash dividends paid to shareholders, is greater than fifty percent of the insurer’s remaining surplus as regards policyowners in excess of the minimum required;

• Whether an affiliate, subsidiary, or reinsurer is in good financial shape;

• Contingent liabilities, pledges, or guaranties which individually or collectively involve a total amount which in the opinion of the director or his designee may affect the solvency of the insurer;

The DOI also looks at other legal and technical issues, and pays special attention to whether the insurer has filed false or financial statements and kept accurate books.

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Rates

Before selling a policy, the DOI requires insurance companies to file their rates to be approved by the Commissioner. The DOI judges whether the rates:

• Meets the requirements of law;• Are fair, with no provisions that are discriminatory, deceptive,

ambiguous or misleading;• Are not part of scheme of unfair or misleading advertising

Rates are approved or denied by the DOI within 30 days.

Unfair Claims Settlement Practices

Insurance companies must mind their P’s and Q’s when settling claims because the DOI is watching! Here is what they are looking for:

• Knowingly misrepresenting to policyowners or third-party claim-ants pertinent facts or policy provisions relating to coverages at is-sue, or providing deceptive or misleading information with respect to coverages.

• Failing to acknowledge with reasonable promptness pertinent communications about claims made under its policies, including third-party claims arising under liability insurance policies.

• Failing to adopt and implement reasonable standards for the prompt investigation and settlement of claims, including third-party liability claims, arising under its policies.

• Not attempting in good faith to effect prompt, fair, and equitable settlement of claims, including third-party liability claims, submit-ted to it in which liability has become reasonably clear.

• Compelling policyowners or claimants, including third-party claimants under liability policies, to institute suits to recover amounts reasonably due or payable by offering substantially less than the amounts ultimately recovered through suits or settlements.

• Offering to settle claims for an amount less than the amount otherwise reasonably due or payable based upon the possibility or probability that the policyowner or claimant would be required to incur attorneys’ fees to recover the amount reasonably due or pay-able.

• Invoking or threatening to invoke policy defenses or to rescind the policy from its inception, not in good faith, but for the primary purpose of discouraging or reducing a claim.

• Any other practice which constitutes an unreasonable delay in paying or an unreasonable failure to pay or settle in full claims,

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including third-party liability claims, arising under coverages pro-vided by its policies

Examination of Books and Records

Every 5 years, the DOI conducts an examination of the records of every insurance company, or more often if the Director deems necessary. The DOI can issue subpoenas, administer oaths, and make examinations under oath if they choose to do so. To refuse is to be in contempt of court. Direc-tors of insurance companies are obliged to assist in the examination by making all records available to the examiner. The company’s Certificate of Authority can be suspended or revoked if the insurance company does not cooperate, or if the results of the examination show the company substan-tially out of compliance with the laws of the state.

Disciplinary Actions

The simplest way to have a great insurance career is to know the insurance laws, regulations and state codes and follow them. But if you don’t here’s what will happen.

Hearings

First there will be a complaint; then the Director of Insurance will order a hearing. The Director will give at least 30 days’ written notice of the time and date of the hearing and outline the subject of the inquiry and any spe-cific charges. After the hearing, the DOI may decide to impose a penalty or even a Cease and Desist order.

Penalties

Here are some of the penalties that the South Carolina Department of Insurance can impose on an individual Producer, and these are in addition to any criminal penalties imposed by criminal penalties or other remedies imposed by law:

• A fine of up to $2,500 • Suspend or revoke the Producer’s license• Both of the above• If the violations are willful, the fine is doubled.

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If the DOI determines a violation warrants a criminal penalty, the case can go to the Attorney General for prosecution. If found guilty, the violator can expect:

• Conviction of a misdemeanor – $2,500 fine, imprisonment up to 2 years, or both.

• Conviction of the really serious misdemeanor or performing an act without a license – fine of up to $10,000, imprisonment of up to 2 years, or both.

Cease and Desist Order

If, after a hearing, the director or his designee determines that a method of competition or an act or practice falls under the definition of unfair or deceptive the DOI can issue an order requiring the person to Cease and Desist from engaging in the method of competition, act, or practice, and impose other penalties.

So, if you’re a smart aleck and “contemptuously” violate a Cease and De-sist order, the DOI can really bring down the hammer – a fine from $50 to $100 per day of violation, depending on how willful the Director decides you have been.

GETTING YOUR LICENSE

Who needs a license? You do if you’re planning on selling Life, Health or Annuity contracts. As you can see by the following excerpt from the Code, the state has no sense of humor about sneaky people who peddle insurance without a license.

Any person who performs an act without a license required by this title is guilty of a misdemeanor and, upon conviction, can be fined up to $10,000 or imprisoned for 2 years, or both.

Yikes!

Types of Licenses and Their Requirements

Producer

For some years now, the word Producer has been replacing what was tra-ditionally known as an insurance Agent. South Carolina’s Insurance Code defines Producer as anyone who:

• Sells, solicits, or negotiates insurance on behalf of an insurer;

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• Takes or transmits (other than for himself) an application for insur-ance or a policy of insurance to or from an insurer;

• Advertises or otherwise gives notice that he or she will receive or transmit insurance applications or policies;

• Receives or delivers a policy of insurance of an insurer; • Receives, collects, or transmits any premium of insurance; or • Performs any other act in the making of an insurance contract for

or with an insurer, even if these acts are done by an employee of an insurer or at the request of an insurer.

In other words, you can’t have anything to do with writing or receiving applications, or selling insurance unless you are a licensed and ap-pointed Producer. A Producer can be licensed for multiple lines of insur-ance as long as he or she passes the state exams.

To earn your resident Producer license, you must:

• Be at least 18 years of age• Be a person of good moral character who, in the last 10 years,

has not been convicted of a felony or any crime involving moral turpitude that would constitute a ground for denial, suspension, or revocation under the South Carolina Insurance Code

• Pay the required fees, including exam and license fee• Pass the state exam for the lines of insurance you wish to sell. In-

cidentally, if you flunk the exam or don’t show up for it, you need to reapply and pay the required fee (again!).

• Complete the license application within a year of passing the exam.

• Submit a South Carolina Law Enforcement Division (SLED) report that is no more than 3 months old when you apply. A SLED report can be obtained through the SLED website (http://www.sled.sc.gov/). It costs 25 bucks to have the report completed and you are responsible for making sure the Department of Insurance gets your SLED report.

• If you want to sell Variable policies, you will need to submit proof of your Series 6 or 7 certification. A screen shot of the NASD Cen-tral Registration Directory (CRD) that shows your CRD number and proof of certification will do the trick.

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Nonresident Producer License

A person who holds a valid Producer license in another state and wants to do business in South Carolina can receive a South Carolina Nonresident Producer license for the same lines of authority IF that person:

• Is currently licensed as a resident in good standing in his or her home state;

• Submits the proper request for licensure and pays the required fees;

• Provides the Commissioner a certified copy of the application for licensure that the person submitted to his home state, or an original completed Uniform Application;

• Lives in a state that has reciprocity with South Carolina.

A nonresident Producer who changes address must provide the Commis-sioner with the new address within 30 days.

The same process applies for a nonresident who wants to get a South Carolina Surplus Lines Producer license, Credit, or other Limited Line licenses.

Temporary Producer License

The Commissioner is authorized to grant a 180-day Temporary Producer License if it is necessary for servicing an insurance business in the follow-ing situations:

• The licensed Producer dies or becomes mentally or physically disabled and the surviving spouse or a court-appointed representa-tive needs time to either sell the business or to allow the affected Producer to return to the business;

• The Producer who is designated as responsible for an agency dies or becomes disabled;

• A Producer enters the armed forces and his or her designee needs a temporary license;

• Any situation in which the Commissioner decides a temporary license is in the public interest.

By the way, the Commissioner can limit a temporary license in any way that makes sense, like requiring a temporary licensee to have a licensed sponsor who will take responsibility for the acts of the temporary licensee.

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Surplus Lines Broker License

In South Carolina, an insurance Broker is a licensed Producer who holds a license to sell Property and Casualty policies. A Broker may also place insurance with either with an eligible Surplus Lines insurer or with a licensed Producer appointed by an insurance carrier licensed in South Carolina.

Agency Licensing

An agency acting as a Producer is required to obtain an insurance Produc-er license. Application must be made using the Uniform Business Entity Application. To get approval of the application, the agency must pay the prescribed fees and designate a licensed Producer or other person respon-sible for the agency’s compliance with South Carolina insurance laws, rules and regulations.

Appointment

Getting your license is not the end of the story. Before you can actually sell insurance, you must be appointed by an insurance company or agency authorized to do business in the state. An insurance company can also cancel your appointment and, in that case, must notify the DOI within 30 days after the termination.

Suitable for Framing!

In this digital age, the Department asks you to print your own Letters of Certification and insurance License through the South Carolina Depart-ment of Insurance website.

KEEPING YOUR LICENSE

License Renewal

Your license is good for 2 years, after which it must be renewed by the last day of your birth month. So, if you were born in November and get your license in December, you need to renew 23 months later by the end of November, and then every 2 years thereafter. To qualify for renewal, you must prove that you have completed the required Continuing Educa-tion credits, fill out the renewal application, and pay the required fee.

You should not procrastinate renewing your license. If you don’t do it

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by the due date, you have a 6-month grace period, but during that time your license is not valid, and to get it reinstated you must prove you have earned the necessary CE credits and can expect pay a penalty.

A licensed Producer who is unable to comply with license renewal pro-cedures due to active military service or some other extenuating circum-stance (like a long-term medical disability) may request a waiver of these procedures. The Producer also may request a waiver of any examination requirement or any other fine or sanction imposed for failure to comply with renewal procedures.

Continuing Education Requirements

To keep your resident Producer license, you must complete 24 credit hours in each 2-year period. The only tricky part is calculating when the 2-year period begins and ends. If you earn more than the required 24 hours in any biennial period, as many as 18 credit hours can be carried for-ward and applied to the next biennial.

• Producers born in an even-numbered year must comply by the end of the birth month in even numbered years. So, if you were born in September 1990, you need to earn 24 CE credits by the end of September in every even-numbered year.

• Producers born in an odd-numbered year must earn 24 CE credits by the end of their birth month in every odd-numbered year.

More details:

• Non-resident agents may comply by meeting the requirements of their home state.

• Resident and non-resident agents must pay a CE fee ($7.50, but that is subject to change) for each year. Agents will not be com-pliant unless the fee is paid for both years of a biennium. That’s a total of $15 state fees for 2 years – a bargain compared to many other states.

• Grandfathering is available. A written letter must be mailed to the South Carolina Department of Insurance requesting the exemption from the continuing education requirement.

Tell Them Where You Are!

South Carolina law requires all licensees to notify the Department of any change in address within 30 days. Licensees may be subject to adminis-trative disciplinary action for not notifying the Department of an address change within the time limitations, and we’re talking real money – up to

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$2,500!

The process of changing your address is a snap, and you can do it online at the Address Change Request (ACR) page on the National Insurance Producer Registry (NIPR) website (https://pdb.nipr.com/ACR/SignIn).

MORE PRODUCER DUTIES

Assumed Names

An insurance Producer doing business under any name other than the Pro-ducer’s legal name is required to notify the director or his designee prior to using the assumed name. Hey, that’s only fair!

Reporting of Actions

A Producer who is the subject of administrative action in another juris-diction or by another South Carolina governmental agency is obliged to report the matter to the SCDOI within 30 days of final disposition of the matter. The report must include a copy of the order, consent to order, or other relevant legal documents.

The same goes for any criminal prosecution of a Producer. Within 30 days of the initial pretrial hearing date, the Producer is inform the Com-missioner of the matter, including a copy of the initial complaint filed, the order resulting from the hearing, and any other relevant legal documents.

Keep Those Records!

Producers are required to keep records of their business for a minimum of 5 years. The records need to include details for every policy or renewal, including:

• Name of the policyowner• Term of insurance• Amount insured• Amount of premiums

Act as Fiduciary

You will recall that acting as a fiduciary is a solemn role of trust for Producers. Here are behaviors that the DOI considers a failure to act as

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fiduciary:

• Do insurance business in the State without the authority of the insurer, or pretend to represent an insurer who is not authorized to do business in the State

• Collect cash advances by false statements• Fail to turn over or account for all collections made on behalf of an

insurer

A person who violates these fiduciary duties is guilty of a misdemeanor and, upon conviction, will be fined according to the discretion of the court or imprisoned for up to 2 years.

Watch Those Blank Forms!

No producer may sign any blank application, contract, or policy of insur-ance. The only blank documents that a Producer can sign in person or with a stamp are Travel policies issued through coin-operated machines.

Sharing Commissions

A few points about commissions:

First, an insurance company can only pay commissions to licensed Pro-ducers.

Second, a Producer cannot accept from an insurance company or client a commission, brokerage, service fee, or anything else of value without be-ing licensed.

Third, a Producer can receive a renewal commission as long as he or she was licensed when selling the original policy.

Finally, it’s OK to pay a finder’s fee to an agency or another person who does not sell insurance as long as it is not based on completing the sale.

More on Representing Unlicensed Companies

You already know that it’s unlawful to represent an unlicensed company. What you may not know is that you can be held personally liable for the limits of coverage on that policy, as well as for all licenses, taxes, and other financial obligations associated with that kind of seamy transaction.

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UNFAIR TRADE PRACTICES

Every state has a version of the Unfair Trade Practices model legislation that is offered by the National Association of Insurance Commissioners (NAIC). If you are in a rush to lose your license or face heavy fines, get caught violating one of these unfair trade practices!

Misrepresentation

Misrepresentation is, quite simply, any communication that incorrectly represents any facet of an insurance policy. The misrepresentation can come directly from you or someone operating under your direction. It can happen in a pamphlet, estimate, written or oral statement or policy comparison. It can happen in an email a telephone call, by commission or omission. Common misrepresentations on applications include knowingly:

• Making a false or fraudulent statement to anyone (including prospects, policyowners, other Producers) for the purpose of get-ting money or any other benefit.

• Omitting features in a policy comparison, like failing to mention the impact of a pre-existing condition.

Again, misrepresentation is an action made knowingly. An accidental typo doesn’t count.

Coercion, Boycott and Intimidation

These three Unfair Trade Practices are often related. Strictly speaking, boycott and intimidation are strategies of coercion. Coercion happens when someone is forced to do something that he or she doesn’t want to do. In an effort to coerce an action, an unethical Producer could threaten to lead a concerted action to not buy the policyowner’s products (to use just one example) unless he or she buys or renews a policy – in other words, to boycott the policyowner’s financial interests. Or, a nasty Producer could try to intimidate a prospect by making threats like, “Buy this or you’ll never see your dog again!”

In a larger legal context, coercion, boycott and intimidation constitute an unreasonable restraint of trade. They extend anti-trust and anti-coercion protections to insurance consumers. Insurance companies are subject to the same restrictions. They cannot merge, for example, if the merger would result in a monopolistic or even anti-competitive market environ-ment.

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Defamation of Character

You defame someone’s character when you either write or say things that personally attack someone’s character or reputation. This is not only unethical, it is stupid and bad for business.

False Advertising

No advertisement, in any form or media, may contain an untrue, mislead-ing or deceptive statement. This includes statements you make in a sales presentation. For example, you can’t misrepresent the terms or benefits of a policy; make a false statement about past dividends or predict future dividends, or make untrue statements about the financial condition of your insurance company. And that’s just for openers, since people are highly creative when devising media ads that “cut through the clutter” to gain at-tention but may, in the process, make false statements.

Unfair Discrimination

Insurance companies are allowed to set terms and conditions for classes of people, but not to offer different premiums or benefits to people in the same class. It is also unfair discrimination for an insurance company to refuse to pay a claim, issue or renew a policy, or raise rates because the insured was treated in the past as a physical or psychological victim of abuse.

False Financial Statements

Insurance companies will be punished for cooking their books, and so will you for making false statements about your own insurance transactions, especially for the purpose of deceiving an examiner.

Twisting

You’ve already learned about this misdeed. Twisting is lying to replace a policy. Or, to quote the state’s catchier way of putting it:

No person may make a false, misleading, fraudulent, or incomplete representation or comparison of insurance policies or insurers for the purpose of inducing or intending to induce any person to lapse, forfeit, surrender, terminate, retain, or convert an insurance policy or to take out a policy in another insurer.

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Twisting is covered in more detail in the next chapter.

Churning

Churning is sometimes called internal twisting. It is an attempt by an un-scrupulous Producer (certainly not you!) to cancel an existing policy and replace it with a new one from the same insurance company, paying for the switch using the cash value from the old policy. This is good for the Producer’s commission but almost always lousy for the policyowner.

Rebating You are not allowed to offer a rebate as a financial inducement to buy a policy. For example, you can’t say, “Hey Cal! If you and Clara buy this policy, I’ll share 50 bucks of my commission with you!” The ban on rebat-ing applies not only to commissions, but also to anything of value.

No Free Lunch and No Free Insurance!

You cannot offer free insurance as an inducement for a person to buy goods, property or services. For example, a real estate broker could not offer a free Homeowner’s policy to anyone who buys a house. This prohi-bition does not apply to:

• Insurance against loss of or damage to the real or personal property involved in any sale or services under a policy covering the interest of the seller or vendor

• Credit Life or Credit Accident and Health insurance• Title insurance• Policies that indemnify against breaches of warranties made in

connection with any sale or services

Insurance Fraud Act

The South Carolina Office of the Attorney General oversees a special Insurance Fraud Division that investigates allegations of fraud that are reported by the general public, Producers, and even insurance company employees. A person, insurance company or authorized agency, when act-ing in good faith and without malice, is immune from any liability aris-ing out of filing reports, cooperating with investigations by any authorized agency, or furnishing other information about potential fraud. In other words, they are not civilly liable for libel, slander, or any other relevant tort as a consequence of reporting possible misdeeds. This is also known as whistleblowers immunity.

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In the course of its investigations, the Fraud Division must maintain appropriate confidentialities, but also can require extensive records for examination by its forensic accountants.

Criminal Penalties for Fraud

For an individual’s first offense…

• If the economic advantage was less than $1,000, the person is guilty of a misdemeanor and can be fined from $100 to $500, plus up to 30 days imprisonment.

• If the economic advantage was between $1,000 and $5,000, the fine is from $2,000 to $10,000, the person is guilty of a misde-meanor and may be sentenced for up to 3 years in prison.

• If the economic advantage was between $5,000 and $50,000, the person is guilty of a felony and the fine is from $10,000 to $50,000, plus imprisonment for up to 5 years.

• A second offense earns a felony, regardless of the amount involved, and the guilty party will be fined from $20,000 to $100,00 AND imprisonment

Civil Penalties for Fraud

In addition to the criminal penalties outlined above, civil penalties for fraud include:

• First offense – a fine up to $5,000• Second offence – a fine from $5,000 to $10,000• Third and subsequent offenses – a fine from $10,000 to $15,000

Consumer Information Privacy Regulations

South Carolina echoes other states as well as federal privacy regulations like those associated with HIPPA with a system to protect the financial and health privacy of consumers.

• The main safeguard is a Notice of Privacy. A “clear and conspicu-ous” notice is required when the Producer or insurance company establishes a customer relationship with the consumer and it should accurately reflect the company’s privacy policies.

• The notice includes some version of the following words in 16-point type:

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PRIVACY NOTICE “NEITHER THE U.S. BROKERS THAT HANDLED THIS INSURANCE NOR THE INSURERS THAT HAVE UNDER-WRITTEN THIS INSURANCE WILL DISCLOSE NONPUBLIC PERSONAL INFORMATION CONCERNING THE BUYER TO NONAFFILIATES OF THE BROKERS OR INSURERS EXCEPT AS PERMITTED BY LAW.”

The Code insists that Insurance companies and Producers are not allowed to share “personally identifiable” financial information about the consumer, including data from:

- An insurance application- An Internet browser cookie- A consumer report- Any source about the consumer if it is disclosed in a man-

ner that indicates that the individual is or has been the licensee’s consumer

• Information that is widely available from government records or distributed media is not prohibited from sharing.

REPORTABLE CRIMINAL ACTIONS-MONEY LAUNDERING

Background

In the wake of the 9/11 attacks, Congress passed the Patriot Act, which is strengthens U.S. measures to prevent, detect, and prosecute international money laundering and the financing of terrorism. These efforts include anti-money laundering (AML) tools that impact the banking, financial, in-vestment, and insurance communities. The Financial Crimes Enforcement Network (FinCEN) of the Treasury Department issued rules for insurance companies to be in compliance with AML requirements.

Covered Products

The Covered Products are those that FinCEN believes have features, such as cash surrender values, that pose money laundering and terrorist financing risks, and include:

• Permanent Life policies• Annuity contracts• Other insurance products with features of cash value or investment

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Covered products do not include: • Reinsurance• Group Life insurance• Group Annuities• Term Life (including Credit Life)• Property and Casualty• Health• Other kinds of insurance policies that do not have cash value or

investment features

The rules also do not apply to insurance companies that offer covered products as an incidental part of their non-insurance business, tax-exempt organizations offering charitable gift annuities.

The Rules

Insurance companies must develop and implement programs designed to prevent them from being used to launder money or finance terrorist activi-ties. The AML program must be in writing and specifically:

• Incorporate policies, procedures and internal controls based on an internal risk assessment

• Designate a competent compliance officer responsible for admin-istrating the AML program

• Provide ongoing training for appropriate employees, agents, bro-kers and others

• Provide for independent testing of the program on a periodic basis.

Insurance companies are responsible for integrating Producers and Bro-kers into their AML programs by obtaining customer information from them and using that information to assess risks and identify indicators for money laundering. Part of the Patriot Act also requires insurance compa-nies to share their information with banks and other financial institutions.

You can expect your insurance company to provide training in AML guidelines. In fact, your business relationship with an insurance company is in jeopardy if you do not cooperate with AML efforts.

SARs

During your AML training, you will learn that insurance companies are required to file Suspicious Activity Reports (SARs) with the feds. What is suspicious? A transaction involving $5,000 or more if the company “knows, suspects, or has reason to suspect” that a transaction:

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• Involves funds derived from illegal activities or is intended to hide funds derived from illegal activities

• Is designed to evade other reporting requirements (such as those that apply to large cash transactions under the Bank Secrecy Act)

• Has no business or lawful purpose, or• Involves the use of the insurance company to facilitate criminal

activity.

Insurance companies are only required to file SARs that involved covered products. They are not required to report submissions of false or fraudu-lent information to obtain a policy or make a claim, unless a company believes that the activity is connected to money laundering or terrorist financing.

GUARANTY ASSOCIATIONS

Do insurance companies ever become insolvent? Not often, but yes, they do. Most states have Guaranty Associations to help the policyowners of a company that becomes insolvent, and South Carolina is no exception. Two Guaranty Associations operate in South Carolina, one covers Life, Accident and Health policies and the other covers Property and Casualty contracts.

South Carolina Life, Accident and Health Insurance Guaranty Association (SCLAHIGA)

Purpose

The South Carolina Life and Health Insurance Guaranty Association (SCLAHIGA) was created by the legislature in 1972. It is not an agency of the state government, but a private entity composed of all insurance companies licensed to sell direct Life and Health insurance and Annuities in the state. The Guaranty Association’s mission is to protect policyowners from the financial failure of their insurance companies. Generally, SCLA-HIGA covers individual policyowners and their beneficiaries, insureds who hold certificates of insurance issued under policies of Group Life or Group Health insurance may also be covered. Every company licensed to sell Life, Health or Annuity contracts in South Carolina is assessed an amount equal to a percentage of their business to cover current or antici-pated insurance company failures.

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How It Works

When a Life or Health insurance company is financially impaired or insol-vent, policyowners receive a notice from the Guaranty Association, and/or the court-appointed receiver, to inform policyowners of any new claims procedures. Sometimes the process is almost transparent; the receiver may continue to process claims using the liquidated company’s existing claims staff, if that would maximize the speed and efficiency of claims process-ing. In other cases, the Guaranty Association processes the claims itself, jobs them out to an existing insurance company, or uses an independent processing company (third-party administrator) to process them.

Meanwhile, policyowners must continue to pay premiums in order to continue coverage.

Life and Annuity Policies

In most cases the policies will be continued as long as premiums are paid. Unless notified differently, policyowners should continue making pre-mium payments in the same way. The policy will probably be transferred to another insurance company. This arrangement will be made by SCLA-HIGA and may take 6 to 12 months.

Health Insurance Policies

Contracts may be cancelled by the liquidation court. If allowed under the policy, SCLAHIGA may also cancel these contracts after the required notice to the policyowner. Or, the premium may be increased as allowed by the policy. Policyowners can continue the coverage in force by paying the premium until they are sent notice that the policy is being cancelled. If the policy cannot be cancelled, it may be transferred to another insurance company.

Limits of Protection

State law limits Guaranty Association protection to an aggregate of $300,000 that comes from the Association’s funds. In other words, the Association will provide coverage for your policy or policies up to the $300,000 limit.

But it’s a little trickier than it first sounds. Generally speaking, 60% of your payments come from the assets of the failed company and the Guar-anty Association makes up the difference.

Let’s start with an easy example. You have a Life policy with a death ben-efit of $300,000. Your insurance company fails just before you die. Your

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beneficiary will still receive the $300,000, and probably doesn’t care that 60% of the money comes from the failed company’s assets and 40% from the Guaranty Association’s fund.

Here’s an example of an Annuity payout. You have a $250,000 Annu-ity policy issued by a member company that has been declared insol-vent. From the assets of the insolvent company you can get 60% of your $250,000 or $150,000. The Association will provide the other $100,000 to make you whole and bring your contract back up to $250,000.

Another Annuity example: You put $100,000 into an Annuity and have earned $25,000 in interest since the initial deposit. Will you get the interest earned on the policy? Yes, the value of your policy is the value as shown on the records of the failed company including any interest that was cred-ited to you prior to the declaration of insolvency.

Now a more complicated scenario: You own two $200,000 Annuity policies issued by a member company that has been declared insolvent. The two policies have a combined value of $400,000. From the assets of the failed company you can get 60% of your $400,000. The Association divides this $400,000 total into two parts, a $300,000 part and a $100,000 uncovered part. On the $300,000 covered part you would receive $180,000 from the assets of the insolvent company. The Association would pro-vide assets of $120,000 to make you whole on the first $300,000. On the $100,000 uncovered part you would receive $60,000 from the assets of the company. Your total recovery in this example would be $360,000. No, you will not receive the entire $400,000, but you do receive the first $300,000 in full, which is all the Association guarantees.

What is NOT Covered

The SCLAHIGA Act specifies that policies and contracts from non-licensed insurance companies are not covered. Beyond that, the FLA-HIGA Act excludes all of the following:

• Policies issued by companies not licensed to do business in South Carolina

• All products of Health Maintenance Organizations (HMOs)• All policies and certificates issued by a Fraternal Benefit Society• Policy benefits not guaranteed by the insurer, or policies for which

the policyowners bears the risk, such as Variable Life or Annuity contracts

• Unallocated Annuity contracts (sometimes knows as GICs)• Self-insured plans• Reinsurance plans, including stop-loss contracts• Certain other products that are less common, like ambulance

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service associations, prepaid health clinic insurance, optometric coverage, and others

South Carolina Property & Casualty lnsurance Guaranty Association (SCPCIGA)

The SCPCIGA is the Property & Casualty version of the state’s Guaranty Association. In general, Homeowners , Automobile, Workers Compensa-tion and other Property and Casualty lines are covered. The following lines are NOT covered under the SCPCIGA:

• Life, Annuity, Health, or Accident insurance• Mortgage Guaranty insurance• Fidelity or Surety bonds• Credit insurance• Insurance of warranties or service contracts• Insurance written on a retroactive basis• Title insurance• Ocean Marine insurance• Any transaction that does not involve a transfer of risk

Coverage Requirements

The requirements for coverage protection with the SCPCIGA parallel those for the Life and Health version of the Guaranty Association, with a few twists.

• A policyowner’s insurance company must be found to be both insolvent and placed in liquidation by court order.

• The insurer must be an admitted company, licensed by the South Carolina Department of Insurance.

• Either the insured or the claimant must be a resident of South Carolina, or the property involved must be in South Carolina.

• Business owners are protected UNLESS: - The net worth of the business is more than $25 million for

third party claims, or- The net worth of the business is more than $10 for first

party claims

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Limits of Protection

• Automobile: Up to $300,000 for bodily injury/property damage which constitute a covered claim. The policyowners may also be fully protected under uninsured motorist coverage.

• Property & Casualty: Up to $300,000 for a covered claim.• Workers Compensation: NO limit

A Few Details…

Unearned Premium – Imagine you just paid a premium and the next day are notified that your insurance company has gone belly up. Is the un-earned premium returned? Nope. Instead, you are awarded a deductible of $100.

Proof of Claim – Policyowners must still file proof of claim with the liquidator, just like they would do if their insurance company was still solvent.

Cancellation of Policy –The liquidator will cancel existing P&C policies within 30 days after the date of liquidation, so policyowners are encour-aged to make their own arrangements to cancel and replace the policy as soon as possible.

Help from Another State – In cases where there are “over the cap” claims in South Carolina (that is, claims over $300,000), and where the insured or claimant resides in another state, help may be available from Guaranty funds in other states. Claimants should contact the Guaranty Association in the state where they now live, as well as the one in the state where the failed company is domiciled.

That strategy will make more sense after you understand the way states cooperate with their Guaranty Association coverages.

Where You Live Matters SCLAHIGA only protects policyowners who are residents of South Carolina on the date one of its member companies is declared insolvent. Residents of other states are protected only under the following condi-tions:

• The insolvent insurance company was a company based in South Carolina.

• The insolvent insurance company was never licensed in the poli-cyowner’s state of residence.

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• The policyowner is not eligible for coverage by the Guaranty As-sociation in his state, and

• The Guaranty Association in his state would provide similar pro-tection to residents of South Carolina if a company based in that state were declared insolvent.

Those are the official rules. Let’s decode them a bit.

Policyowners who are not current residents of South Carolina should first check and see if the insurance company that sold them their policy is a member insurer of the state Guaranty Association where they now live. If so, they will have coverage, because Guaranty Association protection is generally provided by the Association in the state of residence at the date of the liquidation order, regardless of where the policy was purchased.

Policyowners who reside in states where the insolvent insurer was not licensed are covered, in most cases, by the Guaranty Association of the state where the failed company was domiciled.

A policyowner who has an emergency need to withdraw money from the cash value of a Life policy or an Annuity can make written application to the receiver. Surrenders and loans may be allowed on a case-by-case basis for genuine hardship situations like:

• Terminal illness• Permanent disability• Substantial medical expenses not covered by medical insurance• Financial difficulties resulting in inability to pay for essential life

support needs like food and shelter• Imminent removal from a hospital, nursing home, or other medical

care facility due to inability to pay• Imminent bankruptcy• Immediate need for college tuition payments for a dependent child.

Don’t Talk About It!

Producers are prohibited by law from using the Guaranty Association as a way to reassure applicants and policyowners about the financial risk of an insurance policy. In other words, you can’t say, “Hey Miss Prospect, relax! Even if this insurance company should go bankrupt, your benefits are protected by Florida’s Guaranty Association!”

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Key Points

Palmetto State Government & Insurance

• Insurance is a state-regulated industry.• The Department of Insurance authorizes insurance companies,

oversees their operations, looks at their books, sets rules & regula-tions for all of us.

• Florida’s biggest insurance big shot = Director of the DOI, a.k.a. The Director or The Commissioner

• State Attorney General runs the Insurance Fraud unit

So You Wanna Be an Insurance Producer?

Yes? Then you had better:

• Be 18 years old• Live in the great state of South Carolina• Be a citizen or legal alien• Give the nice Department people your SLED report that clears you

of being a bad guy • Do not be burdened with a history of felonies or other sneaky

activities• Pass the state exam• Get yourself officially appointed by an agency or insurance com-

pany• And most importantly – Pay your fees!

Oh yes, don’t lie on your license application. That can get you a turn-down on a license, a fine, and even worse.

Fun Things Insurance Producers Get to Do

• Play detective and look out for suspicious transactions of $5,000 or more that could be related to money laundering

• Share commissions with other licensed Producers• Keep your business records for 5 years (OK, that’s not always fun)• Help people in a fair, ethical and legal manner

No No’s

• Any of the unfair trade practices, like- Misrepresentation- Fraud

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- Defamation of character- Coercion, intimidation, boycott- Unfair discrimination- Unfair claims settlement practices- Controlled business- Doing the Twisting dance- False information or false advertising

• Ignore a summons from the Commissioner• Use the Guaranty Association as a selling tool• Sell insurance from an unauthorized company• Sell insurance without a license (See you in the pokey!)

By the Numbers

• 18 – Minimum age to earn a Producer’s license• 30 – Number of days to tell the Director that you’ve moved and

give your new address• 30 – Number of advance days’ notice the DOI gives you before a

hearing• 24 – Number of CE credits you need to earn every 24 months• Last day of your birth month – Date when you need to get your

license renewed every 2 years• 105 – Number of questions you must answer correctly on the state

exam. Yes!• 180 days – Length of time a Temporary Producers license is valid• 5 years – Length of time to keep your business records• 5 years – Time between scheduled examination of every insurance

company’s records• 6 or 7 – If you want to sell Variable products, you’ll need either

Series 6 or 7 certification from the feds• $100 to $100,000 – Fine for criminal fraud, depending on how

nasty you’ve been and how often• $5,000 or more – Tipping point for you to report any suspicious

activities that may involve money laundering• $300,000 – Maximum aggregate payout from Guaranty

Association.

Please return to your course player to take the Chapter 19 study questions.

Life and Health Insurance License Preparation CourVe … · It is much like the Motor Vehicle Code...

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