State Farm promises that it's a "good neighbor." Allstate brags that "you're in good hands." Yet how do you know that an insurance agent -- regardless of whether he or she is with one company or is independent -- isn't a bad neighbor or doesn't have greedy hands?
That's where state insurance regulators step in. Each state as well as the District of Columbia has a government agency that licenses and regulates insurance agents. It's a safety net that's designed to weed out crooked or unethical agents. And for the most part, experts say, the safety net works.
Consider, for instance, the case of Reid Nelson, a former insurance agent from Albert Lea, Minn., who was sentenced to three months in jail for theft and forgery.
According to news reports, Nelson pleaded guilty in May 2011 to stealing more than $220,000 through his company, Strong Agency Inc. He provided fake certificates of insurance to a local construction company while pocketing the premiums.
Nelson also was charged with stealing $30,000 from the former owners of a townhouse complex he managed, writing checks for personal reasons that may have included a compulsive gambling habit. In addition to his time in jail, Nelson’s penalty includes five years of probation for the theft charge, 10 years of probation for the forgery charge and the loss of his insurance license.
“When talking about a bad agent, a crooked agent, this is what you usually find -- someone pocketing the money without writing a policy,” says Alan Haskins, government affairs director for the nonprofit National Insurance Crime Bureau. “This is why it’s important for each state to make sure its agents are upstanding citizens. There are bad agents out there taking advantage of consumers, and they need to be rooted out.”
According to the U.S. Department of Labor, all insurance agents must obtain a license in the state or states where they plan to work. Separate licenses are required to sell life and health insurance and property and casualty insurance. Moreover, in most states, licenses are issued only after an applicant completes pre-licensing courses and passes state exams covering insurance fundamentals and state insurance laws.
“Getting licensed is a pretty extensive process,” Haskins says. “It’s not as simple as saying, ‘I want to be an insurance agent,’ and then hanging a shingle.”
In Illinois, the process has worked. In July and August 2011, the state’s insurance department announced disciplinary action against four would-be agents applying for licenses. The list of crimes was as varied as it was severe -- everything from arson to marijuana trafficking.
Tim Cena, general counsel for the Illinois Department of Insurance, says most would-be agents report past offenses on their applications. If someone admits to having been charged with a felony in the past 25 years, Cena says, the department assigns an investigator to the case and eventually holds a hearing to determine whether the applicant is fit to sell insurance.
“This system exists to protect the public,” Cena says. “Lots of people think they can sell insurance, and sometimes their backgrounds don’t agree with that assumption.”
Other potential red flags on an application include a past bankruptcy filing or late child support payments. According to Cena, both of these categories often warrant further investigation.
Haskins says that while the current system of self-reporting past felony convictions may work for many departments, he would like to see every state mandate criminal background checks on people seeking to become insurance agents.
“Requiring all applicants in every state to go through that would certainly go a long way in preventing some of these bad players from getting into the industry," Haskins says.
Caught in the act
Even if someone obtains a license to sell insurance in his or her state, there are several mechanisms in place to protect consumers from bad behavior.
“I’ve seen (insurance) departments become really aggressive against rogue agents in the last 15 years,” says Sonja Larkin-Thorne, a former insurance executive who is a consumer liaison with the National Association of Insurance Commissioners. “They’ve gotten much better at educating both the public and the agents out there.”
Most state licensing authorities, for instance, have mandatory continuing education requirements agents must complete every two years. These requirements focus not only on insurance laws and the technical aspects of writing policies, but also on consumer protection and ethical business practices.
“No matter what state it is, insurance departments are good at keeping on top of this,” says Mike Barry, a spokesman for the Insurance Information Institute and former director of public affairs for the New York State Department of Insurance. “Agents have to jump through a lot of hoops, not only to get licensed but to keep the license.”
Penalties for crooked agents vary from state to state and depend on the severity of the offense. For example, Phyllis Golden of Seattle was fined $250 in September 2011 for providing false information about continuing education courses. Meanwhile, a Texas agent was fined $100,000 in July 2011 for failing to acknowledge the receipt of a claim in a timely fashion, failing to notify the consumer of the claim’s acceptance or rejection and failing to provide complete data to the state Department of Insurance.
Robert Hunter is director of insurance at the nonprofit Consumer Federation of America. With more than 50 years of experience in the insurance industry -- including a stint as Texas' insurance commissioner -- Hunter praises the current level of communication among the states, which often prevents bad agents from simply closing up shop and skipping town. These days, if an agent is fined or forced to forfeit his or her license, the state department responsible will notify the National Association of Insurance Commissioners, which then will alert all of the state insurance regulators.
“It used to be that if an agent got busted in one state, he would just move to another,” Hunter says. “You’ve now got a repository of bad actors that is available to all states, and they can look at that repository anytime someone applies.”
That being said, Hunter would like to see state insurance departments conduct more thorough examinations of large insurance companies.
“The system doesn’t work so well at protecting consumers against big, giant entities,” Hunter says. “It works pretty well at catching smaller agents who are cheating people out of their money, but you don’t usually see many big names on the list.”
Mark Briscoe, a spokesman for the National Association of Insurance and Financial Advisors (NAIFA), a trade group, says the industry does a good job of self-policing. Since of the level of communication among state agencies, consumer advocates and watchdog groups has become ever-present and immediate, dishonest agents don’t last too long, he says.
“There are, of course, bad actors in every profession, but NAIFA members have dedicated themselves to their profession,” Briscoe says. “They are honest and dedicated to their clients. They rely heavily on referrals and repeat business to be successful, so those who are dishonest probably don’t stay in business long.”
Barry says the majority of state investigations into insurance agents begin with consumers' calls to state insurance departments.
“If you think something’s amiss, get your state insurance department involved immediately," Barry says. “You need to speak up and say, ‘Wait a minute. Something’s not right here.'"
Several consumer complaints led Hunter to one of his most memorable investigations during his tenure in Texas. He was alerted by several consumers to a fraudulent agent who claimed to be selling life insurance to soldiers at one of the state’s military bases. But rather than writing policies, the agent was pocketing the premiums.
“You have to be your own advocate when dealing with insurance agents,” Hunter says. “You can’t trust the state to protect you from every bad agent out there. Keep good notes. File complaints or lawsuits. You have to be ready to defend yourself.”
Illinois’ Cena says consumers must be prepared to follow through with complaints, even if the process takes awhile.
“We are required to hold a formal hearing in order to revoke someone’s license, and if we can’t get consumer witnesses to come down and testify, we’re probably not going to prevail,” Cena says. “This is a big problem for our prosecutors.”
The crime bureau's Haskins says you can protect yourself from being victimized by a shady insurance agent. For one thing, you should visit your state’s insurance department website to make sure the agent you’re dealing with has an active license. Also, you should call the insurance department to find out whether that agent has had complaints lodged against him or her.
“The overwhelming majority of agents are honest individuals with deep roots in communities,” Barry says. “But you need to protect yourself from a few crooks out there.”