The Life, Disability and Health Insurance Agent

There are many ways to define the term, “insurance agent”. Fundamentally, an insurance agent is a licensed individual who solicits sales for an insurance company, or a number of insurance companies. The agent is subject to the state licensing laws of every state in which he sells life, health and disability insurance.

Captive v. independent agent

If an agent is licensed with only one company, he is referred to as a “captive agent”. And he can only sell the insurance products of that company. If he is licensed with many companies, he is referred to as an “independent agent” because he is not restricted to selling the products of only one company.
But every agent can only sell the products of companies for which he is licensed to sell. This is important for you to know because an independent agent who can sell for many companies, if he is conscientious, has a better likelihood of selling you the best product to meet your insurance needs because he has more products from which to choose. In order to make the sale (and earn the commission), a captive agent may try to convince you that his company’s product is the best for you when in fact there are better products for your situation in the marketplace.

The Importance of Dates in Your Insurance Policy

Dates (not to be confused with the social encounter or the fruit) in the insurance world are critical. There are three specifically that are often confused with each other, but are highly crucial in insurance litigation. And to make it more befuddling, insurance companies each have their own definitions of those terms in their policies which they are supposed to follow. The three terms are issue date, policy date and effective date. We will give you the generally understood meaning of these terms.

The issue date is normally the date on which the insurance company approves and accepts your application. The policy date is the date written on the policy. These two are sometimes the same, but insurance companies often add a few days to the issue date to name a policy date. This allows time for the policy to be delivered to the insured. The effective date is the date on which the legal obligation by the insurance company is created.
The policy date is important because so many time periods under the policy start with it: The suicide and contestable periods, due dates of renewal premiums, expiration date of grace periods, availability and amount of nonforfeiture values and the duration of any extended term insurance.

The effective date is significant because it is the date on which the insurance company becomes liable under the contract. Insurance companies usually try to make the effective date very clear in their policies and define it in the policy and the application. The date on which a policy first takes effect is determined by several factors, such as whether a premium was paid with the application and if a conditional receipt was given for the premium if a premium was paid.

Almost all applications read that coverage is not effective until the policy is delivered and the first premium is paid. Therefore, these criteria must be met before the policy is considered to be in place. Backdating a policy usually results in different issue and effective dates. In that circumstance, premium due dates are ordinarily computed from the date of issue, while contestable and suicide periods run form the effective date. The effective date under a conditional receipt depends on the language of the receipt and state law.

This is a very complicated area of the law and courts apply different legal theories, depending on the facts and circumstances of each case. To give you a few examples, one court determined that a suicide period in a life insurance policy ran from the date the policy was issued and not from the date of the conditional receipt because the court considered the policy and the receipt to be two separate contracts. If the date of the conditional receipt had applied, the suicide period would have expired and the insurance company could not have used it as a defense and would have had to pay the death benefit. However, because the two year suicide exclusion ran from the policy date (also the issue date in this case), the court determined that the insurance company properly denied the claim.

In another case, the court held that coverage began when the insured first paid his premium and not on a later date defined in the policy because that was what the insured could reasonably have expected (in legal parlance, called the “doctrine of reasonable expectation”). The policy excluded death from suicide within two years of the effective date of coverage, and the insured committed suicide more than two years after the first premium was paid but less than two years from the coverage date.

As you can see, if determining the date from which to begin counting a particular time period is critical to your outcome, you would be well advised to seek the advice of attorney. There are policy definitional issues, state law issues and judicial interpretation issues, all of which call for expert legal guidance. It is not an area for a novice.

Determination of insurable interest

Courts and state laws have established guidelines for those persons and entities presumed to have insurable interest. They fall into three general categories – relations by blood or marriage, business relationships, and creditors.
Blood or Marriage: People generally have an insurable interest in the lives of their spouses and dependents. Based on this relationship, the general rule of thumb is:
Insurable InterestHusbands and wivesParents and children(including adopted children)Grandparents and grandchildrenBrothers and sistersEngaged couples (some states)
No Insurable InterestOther relatives by marriageNieces and nephews CousinsUncles and auntsStepchildren and stepparents
Business Relationship: An insurable interest may be created in an otherwise non-insurable interest relationship by the creation of a financial dependency or a business relationship between the parties. For example, an uncle may be deemed to have an insurable interest in a nephew because the uncle’s business is run by the nephew and the business, as run by the nephew, is making a lot of money for the uncle.
One who receives economic benefit from the continued life and good health of another has an insurable interest in that person’s life. For example, employers can take out key person life insurance on key employees, corporations can take out insurance on the lives of their officers, business partners can take out life insurance on each other.
Creditors: Creditors are allowed to take out life insurance on the lives of their debtors, with the debtors’ consent, up to the limit on the debt. Mortgage and credit insurance are examples of this type of insurance.
Insurance companies have a duty to exercise reasonable care in determining whether insurable interest exists and whether the consent of the insured has been obtained. If they don’t, they may be sued.
For more information on life insurance contracts, read our section on Life Insurance.

The Insurable Interest in a Life Insurance Policy

To stop your good neighbor Sam from taking out a life insurance policy on you and then killing you to get the life insurance money, your neighbor, as the purchaser of the insurance policy, must have an insurable interest in the life of you, the person being insured at the time of application. In dealing with life insurance, a person is deemed to have insurable interest when the purchaser has a reasonable expectation of profit or benefit from the continued life of the insured.
Every state requires that an insurable interest exist at the time of application. Policies issued on lives where there is no insurable interest are regarded as void from the beginning because they are against public policy. They are against public policy because they encourage murder for profit. If there was no insurable interest requirement, some people would be tempted to purchase life insurance policies to collect the death benefit by killing the insured.
A person is always considered to have an unlimited insurable interest in his own life and health. Therefore, the beneficiaries of the policies that an insured purchases on his own life do not need to have an insurable interest. It is presumed that the insured would name as a beneficiary only people who want the insured to live a long and healthy life. A person, therefore, can obtain as much insurance as he wishes on himself – subject to other limits an insurance company might have. For example, insurance companies commonly limit the amount of insurance they will place on a person to that appropriate to his income and life style.

Check for premium included in application

Check for premium included in application
When you attach a check to your application for health, life or disability income insurance, the insurance company may accept or decline your offer.
Nor surprisingly, this also depends on the application’s wording. For example, the insurance company application, by its terms, may state that your offer is not accepted (even though you have included the check for the first premium) until the application is approved by the company’s underwriters. In this situation, if you incur a claim before the underwriting is completed, the insurance company has every right to decline and return your premium.
Alternatively, the insurance company can unconditionally accept both your application and your premium. When they do this, they have formally accepted your offer and a legal contract of insurance is formed.
Or the insurance company may reject your offer and end negotiations.
Or the insurance company may reject your offer by making a counter-offer. A counter-offer is a new set of terms and conditions given in response to your original offer. The difference between the original offer and the counter-offer may be an increase in premium, for a health insurance policy the addition of a rider excluding coverage for treatment for certain health conditions, or for a disability income policy a change in the terms of coverage, such as offering to issue for a reduced monthly benefit from that for which you applied. If you do not accept the new terms, there is no contract of insurance.
Check not included in application
If you do not attach a premium check to your insurance application, you are inviting the insurance company to make an offer to you. The insurance company may end the negotiations or may make an offer of insurance. You accept when you receive delivery of the policy and pay the first premium.
Whether an offer or a counteroffer is made, the second component—acceptance—must occur by you as the prospective policyholder.
If you have included the first premium with your application and you are otherwise insurable on the date of your application, you ordinarily have the right to expect to have coverage from the date of application even if you are injured or killed while the insurance company is deciding whether to accept your offer. In this case, you are generally protected by the terms of the premium receipt given to you at the time you completed the application.
The technicalities of offer and acceptance, often controlled by the precise wording of your application and the premium receipt can be tricky. If you have an issue with an insurance company, you should contact an attorney for guidance.

The Making of a Life, Health and Disability Income Insurance Policy

An insurance policy is a contract between the policy owner (this can be the insured or someone else) and an insurance company. And because it is a contract, it is governed by rules that apply to general contract law.
One of the principles of contract law is the concept of “offer and acceptance. Each insurance contract requires an offer by one party and an acceptance of that offer by the other party.
The insurance application is the starting point. When you fill out and sign the insurance application for life, health or disability income insurance and you include the first premium with it, you are usually considered to be the party who is making the offer. As previously stated, an offer is the first step in forming a contract. The next step is the insurance company’s acceptance of the deal.
Insurance companies act through their agents. An agent having proper authority to act on behalf of a life, health or disability income insurance company can only invite an offer of insurance. (The life, health and disability agent cannot make a binding insurance contract. This differs from some other types of insurance, such as property and casualty insurance. Often agents selling auto or homeowners insurance, acting on behalf of the insurance company they represent, are able to make binding contracts in the field.)

Knowledge of the Health Insurance and Life Insurance Agent

Under the law of agency, the knowledge and acts of the legal agent are considered to be the knowledge and acts of the legal principal. In the area of health and life insurance, your insurance agent is the legal agent of the insurance company. In other words, the insurance company is responsible for the acts of the agent when dealing with you and is assumed to have all the knowledge that the agent has. This is important for you.

For example, if your insurance agent is aware of a medical condition you have that would make you uninsurable, completes your application for insurance and, without your knowledge or consent, leaves off any mention of your uninsurable medical condition, the insurance company is regarded under the law as having knowledge of your medical condition.. Assuming no other complicating factors, in this case the insurance company, because of this, will not be allowed to assert a misrepresentation on your application to later deny a claim and void your policy.

If an insurance company is attempting to deny your claim on the basis that your medical condition existed prior to the effective date of your insurance policy (a preexisting condition excluded by the policy) or on the basis that the medical information left off of your application is grounds for voiding the policy (which, of course, makes the claim unpayable), you may be able to assert, as a defense, knowledge of the agent and, thereby, of the company.

This defense will not always work. Most insurance companies now have a statement on their applications that the agent does not have authority to alter the application. Many courts have looked to this wording in the application as a basis for refusing to attribute knowledge of the agent to the insurance company when changes have been made to the application. If the court takes that position, then the inaccurate application would be your fault, not the insurance company’s.

Other courts, however, have found the statement limiting the agent’s authority to be insufficient and have held that the agent’s actions and knowledge are those of the insurance company. In these cases, the inaccurate application would be the insurance company’s fault, not yours. Obviously, if your health insurance provider denies your claim based on medical history not shown on your application but you know the agent has knowledge of, you should seek the advice of an attorney experienced in bad faith claims to protect your rights.

Another approach to this issue taken by many insurance companies is to attach the completed application to the insurance policy when the policy is issued to you. This practice is actually required by law in many states. When an insurance company attaches a copy of the completed application to the issued policy, some courts have ruled that you, the insured, have a duty to read the application attached to the policy when you receive the policy and that you must immediately notify the insurance company of any incorrect or incomplete answers.

Whether the court will attribute the alleged actions and knowledge of the agent to the insurance company depends on the facts and circumstances of each case and on state law. Even if your completed application is not attached to your issued policy, some courts have ruled that you have a duty to read your completed application before signing it, and if you do so, it is presumed that you will notice that the agent has improperly completed it. Most applications do have a statement above the signature line whereby you acknowledge having read the completed application.

But each case depends on its own facts. Courts have been known, for example, to attribute knowledge to the insurance company even when the agent advised the insured to change information on the application so the insured could obtain the insurance. This sounds like collusion, which is a secret agreement between the agent and the insured to misrepresent information to the insurance company to defraud it. Ordinarily when collusion is found, knowledge is not attributed to the insurance company, and the courts will not allow the colluding parties to benefit from their wrongdoing.

Revocation of agent’s license

An insurance agent can have his or her licensed revoked or suspended for number of reasons, including fraud, embezzlement, and forgery. Insurance agents can also lose their license for an activity the insurance industry refers to as twisting. Twisting happens when your agent improperly pressures you into dropping your existing insurance so he can sell you a new policy. His primary motivation for selling you the new policy may be so that he can get the first year commission on the new policy. To motivate agents to bring in new business, insurance companies usually offer a high first year commission that is dramatically reduced for the second and later years of the policy. However, if the policies are relatively similar, there are disadvantages to you in canceling your old policy and buying a new policy. For example, the incontestable (time limit on certain defenses) and suicide periods in your old policy may have expired. They will start anew with your new policy, which is not to your advantage.
Another practice that can result in the agent forfeiting his or her license is rebating. This occurs when an agent forks over to you, directly or indirectly, a chunk of his commission or its equivalent, such as a rebate of the policy fee, a valuable gift (such as prime tickets to a big game) to induce you to purchase a policy from him.

If you believe your life or health insurance agent has engaged in fraud, embezzlement, forgery, twisting, rebating, has made an inappropriate or inaccurate sales presentation to you or is not properly licensed with your state insurance department and, if necessary, with the NASD, you should contact an attorney to protect your rights.