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August 25, 2010 at 08:00 PM
The 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.
