Competing Duties of a Life Insurance Agent:

The Potential for a Conflict of Interest

in the Sale of Life Insurance Policies and Annuities

June 15, 2023

By: Robert J. D’Anniballe, Jr.

The legal and regulatory scheme is set up in favor of life insurance companies to the detriment of the agents and customers. The imbalance of duties imposed upon a life insurance agent in the sale of life insurance policies and annuities to a client presents a potential conflict of interest. Life insurance agents owe a fiduciary duty to the life insurance company as a result of their appointment as an agent. State laws provide for a fiduciary duty by agents to their principals. In this case, the life insurance companies are the principals of their agents.

As private equity firms acquire for-profit life insurance and annuity companies, many are highlighting financial engineering concerns that threaten their solvency and the promises and financial security of their insureds. Also, demutualization and overall financial market conditions are raising similar concerns. As a result, life insurance and annuity agents are debating the nature of their duty to their clients, their insurer/principals, and the consideration of replacement products as a solution. This article focuses on these duties, considerations, and process.

Sources of the duty include:

  • Statutory law (mostly State, but in some instances, Federal).
  • Common law.
  • Life agent’s appointment contract with the insurer/principal.
  • NAIC, including Best Interest Model Regulation (#275) in states where it has been adopted.
  • Professional and organizational code of ethics and standards.

In most states, life insurance agents in the sale of policies and annuities owe a greater duty to the insurer/principal than to their client. The duty owed to the insurer/principal is a fiduciary duty – the highest duty that is required under the law! Life insurance agents in the sale of policies and annuities must have the insurer/principal’s best interests ahead of their own. In contrast, life insurance agents in the sale of policies and annuities do not owe a fiduciary duty to their clients in most states; the applicable duty is a lower ordinary care standard, and imposition of an implied contract in most states. The duty is to provide the nature and extent of coverage/product that is requested and necessary based on client’s needs, to know products involved, provide full disclosure, and not misrepresent terms and conditions. The duty to the client includes an obligation not to place the product with an insolvent carrier. Some states provide for a greater duty, such as an ongoing duty to advise, if a special relationship exists between the life insurance and annuity agent and his or her client. It may be argued that a special relationship exists with a client where a life insurance agent is also a Registered Investment Advisor (“RIA”) and serves the client in both capacities.

Replacement Products as a Solution: Once there is a reasonable concern about the solvency of a carrier, a life insurance agent has the duty to consider the option of moving the client to a different carrier as a solution. Replacement is legal under various state laws as long as a full and fair explanation of the rationale for the change is given on the appropriate replacement forms, and proper signatures on these forms are obtained. Such action must be in the best interest of the client after proper diligence and comprehensive consideration of all relevant facts. This author has developed a comprehensive laundry list of necessary considerations in a well-documented prudent process.

Sticky Issues in Moving Forward:

  • Difficult conversation to have with your client.
  • Regulatory hurdles: replacement product compliance.
  • Complying with your fiduciary duty to the subject insurer/principal.

Doing Nothing is Not an Option:

  • Regulatory actions and litigation risks mandate attention.
  • The trend is that the duties owed by a life insurance agent in the sale of policies and annuities to the client are only going to become more complicated over time as a result of the ambiguity caused by the sources of the various duties.

NAIC Reinforces the Dilemma:

  • The majority of states have adopted the NAIC Best Interest Model Regulation (#275).
  • In those states that have adopted Model Regulation (#275), the NAIC has reinforced the dilemma:

First Steps to Peace of Mind:  We are here for you to develop a well-documented prudent process that addresses your duty to your client, regulatory compliance, and your fiduciary obligation to the insurer/principal under your appointment contract.

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