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Insurers Mindful Of Class Action Suits As Suitability Model Proceeds

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Insurers Mindful Of Class Action Suits As Suitability Model Proceeds



Wrangling over the development of a penalties section of a model act and regulation for the suitable sale of insurance underscored just how much attention insurers are paying to the trial bar and the risk of expensive class action suits.

The work during the winter meeting of the National Association of Insurance Commissioners here was just one of several sessions where the impact of class action suits on insurers and on the authority of state insurance commissioners was raised.

The issue during a session on the Life Insurance and Annuities Suitability Model Act focused on proposed language in the penalties section offered by the American Council of Life Insurers in Washington.

The reference would give sole authority of a commissioner to enforce penalties.

Michael Lovendusky, senior counsel with the ACLI, said the potential for private cause of action suits from the trial bar that the penalties section could create is “positively frightening.” That is why the commissioner should have “sole and exclusive jurisdiction” over penalties, he said.

Birny Birnbaum, executive director of the Center for Economic Justice in Austin, Texas, said that in the past, market conduct problems have surfaced because trial lawyers and consumers have filed lawsuits, not because insurance departments have addressed problems.

“In a time of limited resources,” Birnbaum said, “it makes no sense not to rely on the public to identify and help enforce insurance laws.”

Brian Staples, a regulator with the Kentucky department of insurance, said, “I cant support anything that would limit a consumer’s ability to seek what they think is fair or equitable.”

And Dalora Schafer, a regulator with the Oklahoma insurance department, noted that the department is not allowed to do anything that would prevent a consumer from seeking compensation.

Lovendusky also requested an exemption in the model for private placement products so that the insurance industry could remain competitive with securities broker/dealers.

A major point of difference arose during a discussion on who is responsible for suitability. The National Association of Insurance and Financial Advisors, Falls Church, Va., has raised the issue of joint responsibility–of insurers and producers–for the suitability of a product sale for over a year.

Ron Panneton, a NAIFA representative, called the lack of wording to reflect joint responsibility “one of the glaring holes in this draft if there are hopes for it being effective regulation.”

Lovendusky argued that if questions arise over suitability, parties would “go after deep pockets and the insurer would be on the hook. It will create a moral hazard.”

Because insurers are on the hook, he said, some producers would have the incentive to make unsuitable sales and since insurers would have to be involved in all decision-making regarding a sale, it would diminish the viability of the distribution system.

Kevin Hennosy, founder of in Kansas City, Mo., and a funded consumer representative, said that by not having joint responsibility written in the model, it allows the “rogue agent” argument to be used and permits companies to walk away from their responsibilities.

Regulators responded by asserting that they have always viewed suitability as a duty of both producers and insurers.

“It has always been our intention that whoever makes the recommendation is on the hook,” said Rosanne Mead, chair of the suitability working group.

But Hennosy said that unless the language is written down, it would not always be used.

Reproduced from National Underwriter Life & Health/Financial Services Edition, December 17, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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