Imagine this scenario. Joe the Producer is discussing a life insurance policy with a small business owner, and things are looking good. Joe’s fact-finder has identified the client’s need, and he has found the best coverage for the business owner’s particular situation.
Then the prospect throws Joe a curveball: He’ll buy the policy, but only if Joe kicks back a portion of his commission on the sale. This, of course, is also known as rebating, which is illegal in every state except California and under certain conditions in Florida.
Joe’s not in California or Florida and knows very well what the prospect is asking him to do is illegal and could cost him his license. How does Joe proceed from here in an ethical manner?
After being momentarily taken aback by this request, Joe tells the prospect, “That’s illegal. I could lose my license.” After all, perhaps the prospect didn’t know it was illegal and was simply trying to bargain for a better deal on this policy. Surely many consumers are in the dark about the rules in insurance transactions.
But the prospect says “another agent” within his ethnic community has told him he would do it for him because that’s “just how the game is played.”
Now you know a little bit more about the kind of prospect you are dealing with. It’s one thing to ask for a kickback out of ignorance or just to see if you can get a better deal, but quite another once they know it is illegal and they still want it.
Insurance ethics expert Dick Weber, MBA, CLU, AEP, President of The Ethical Edge Inc., and a past president of the Society of Financial Services Professionals, says the answer is simple in every state except Florida and California: “I’m sorry, I am legally prohibited from doing that and if I were to do that I would make myself vulnerable to having my license revoked by the state department of insurance, which would eradicate my ability to make a living.”
In Florida, which was the first state to legalize rebating in 1984, Weber says an agent can only rebate within a “broad class” of client—the first time you offer a rebate for a client, you must do the same for all clients within that broad class.
California’s Proposition 103 repealed that state’s anti-rebating law in 1988 with no such restrictions as Florida. But Weber notes all the major insurance companies immediately prohibited their agents from offering rebates, telling them they would cancel their contracts with any agent found to be rebating commissions.
So while it may technically be legal for agents to rebate commissions in those states, if the insurance carrier finds out about it, the agent can pretty much count on losing his contract with that carrier.
“You are expected to behave the way the carrier intends you to behave,” Weber said. “You probably would not be discovered, but it is contrary to your agreement with the insurance company.”