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Life Health > Life Insurance

The case of the disappearing commission

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Lisa RushThe incident
A life agent wrote several life insurance policies totaling $20 million. Each application had a “no” response to a question asking if any portion of the premium would be financed. The applications were submitted through a wholesale life broker who in turn submitted the applications to the insurer. The insurer approved the applications as submitted and paid a total commission in excess of $1 million to the agent and the wholesale broker.

A few months after the policies were issued, the life agent contacted the wholesale broker to request Assignment of Ownership forms for the policies. The broker inquired why these forms were needed and learned that all of the policies had been financed. At that point, he did not notify the carrier of this fact even though he now knew the risks did not meet the insuring carrier’s underwriting guidelines. The wholesale broker provided the forms to the writing agent, who then provided them to the bank for completion and finally to the carrier.

Upon receipt of the Assignment of Ownership forms, the carrier conducted an investigation into the premium payment of the policies learning that each had in fact been financed using the policy proceeds as collateral.

The outcome
The carrier filed suit contending that both the life agent and the wholesale broker breached their duty to advise them of the premium financing. They sought to rescind the policies and to recover all commission payments.

The life agent contended that the wholesale broker did not instruct him that bank owned life policies were not within the life insurer’s appetite. The wholesale broker’s position was he was unaware of financing until after the transaction was completed through the request for the Assignment of Ownership forms, and that the pertinent information was going be given to the carrier shortly thereafter. Unfortunately, the broker’s “after the fact” account that he was going to inform the carrier left doubts of his veracity. The policies were rescinded and commissions returned.

How it could have been avoided
Communicate any information material to the acceptability of a risk immediately to the carrier. A life insurance agent has a duty to the client to submit an application for coverage that is truthful and discloses the information requested to the carrier so that the carrier can make reliable underwriting determinations. The carrier has a duty to fairly administer its underwriting guidelines. Any attempt by any party within this transaction to circumvent or manipulate the application or underwriting process, can render the entire transaction void from inception.

Lisa Rush, is AVP and Program Leader for Cita Insurance Services. She has been in the insurance industry for more than 28 years. Lisa’s experience with Professional Liability includes well over a decade of sales, servicing and underwriting programs including insurance agents, accountants, dentists, lawyers, architects and engineers, real estate as well as many miscellaneous professional liability programs.

Previous “Claim of the month” articles:
The case of the ‘questionable answer’
The case of the faulty conditional receipt


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