I frequently find articles on fraud in industry journals. Also, agent associations often put this topic on their state convention agendas. While we’ve all heard and read about many traditional scenarios of fraud, there are some new areas that can potentially affect insurance agents.
One of the more recent scams deals with the sale of unregistered promissory notes, allegedly guaranteed by offshore insurance companies. The scam could involve more than 1,000 agents with approximately $300 million in sales to date. Because insurance agents aren’t familiar with securities law, they fall for these scams involving high-interest promissory notes. Be alert for statements or promises such as 'high initial commissions,' 'low risk — the deal carries the same risk as a CD,' 'the investment is exempt from state regulation,' and 'the insurance company is licensed in the state.'
What happens if you’re involved with fraudulent securities distribution? Losing your license is likely, as is some degree of disciplinary action by your state insurance department. Think you might get sued? Count on it.
If you think you can turn around and submit this claim to your E&O carrier, you’re in for an unpleasant surprise. In lawsuits against insurance agents, the complaints usually detail the conduct claimed against the agent. To emphasize the importance of the claim and to seek additional damages, these complaints might include allegations of negligence, breach of contract, and fraud.
Typically, the E&O carrier reviews the complaint in detail and sends a letter, called a reservation of rights, to the insured. The letter reserves the company’s rights to disclaim coverage for the excluded conduct. It doesn’t mean the carrier believes the allegations are true, only that it won’t have liability for any of the uncovered allegations.
Subject to the reservation, assigned counsel defends the insured. Assigned counsel is required to defend all aspects of the case and advise the insured accordingly. In the majority of cases, fraud allegations are unfounded and subject to dismissal by the court. However, if the court determines that you committed fraud, there’s no coverage under the E&O policy for those acts. You’d be responsible for the judgment made against you or your agency.
Does this end your troubles with your E&O carrier? Definitely not. As the long-term manager of the Utica program, I have no desire to provide coverage for agents convicted of fraud. And I doubt that any other carriers would be particularly receptive, either. Without E&O, you expose your agency to future claims and also risk losing good carrier contracts, because many companies require E&O protection.
When dealing with fraud, it’s a no-win situation.