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Jeanine N. Joseph, Esq.
Nemphos Braue LLC
410-321-6151
Lauren B. Ziegler, Esq.
Nemphos Braue LLC
410-321-7842

WHY INSURANCE PRODUCERS SHOULD NOT BE SUBJECT TO A FIDUCIARY STANDARD OF CARE

In February 2019, Maryland Senate Bill 786, also known as the Financial Consumer Protection Act of 2019 (“SB 786”), was introduced in the Maryland General Assembly but ultimately failed to make it out of committee.  The legislation would have provided a wide range of consumer protections in certain areas of financial transactions, including mobile home purchases, security breaches, vehicle purchases, and money transmissions. [1] SB 786 also proposed to amend Title 11 of the Maryland Securities Act to impose a fiduciary standard of care on broker-dealers, broker-dealer agents, insurance producers [2], investment advisors, federal covered advisers, and investment adviser representatives that would require such individuals to act in the best interest of their customers without regard to the financial or other interest of the person or firm providing the advice (the “Fiduciary Standard”) and gave the Maryland Securities Commissioner broad authority to adopt regulations to carry out the Fiduciary Standard. [3]

Proponents of SB 786 argued that the Fiduciary Standard is necessary to ensure that customers are protected from conflicts of interest that create revenue for those in financial advising roles and to provide protections that do not currently exist under Maryland or federal law. SB 786, however, faced extensive opposition from financial institutions, trade associations, and other organizations, who, among other things, took issue with the application of the Fiduciary Standard to insurance producers. [4]  Although Maryland is not the first state to propose legislation that imposes a fiduciary duty on certain financial professionals, it is one of the first states to attempt to expand this duty to insurance producers. [5]

 SB 786 received an overwhelmingly unfavorable vote in the Maryland Senate Finance Committee.  However, a version of SB 786 is expected to be introduced in the 2020 legislative session in Maryland.  This article will explore the many issues with imposing the Fiduciary Standard on insurance producers.  

 

I.  Inconsistent Standards of Conduct for Insurance Producers.

Insurance producers in Maryland are subject to an existing common law standard of care. Pursuant to longstanding case law, an insurance producer owes an insured a duty to “exercise reasonable care and skill in performing his duties. And if such a representative fails to do so, he may become liable to those… who are caused a loss by his failure to use standard care.” [6]  Unless there is evidence suggesting bad faith, disloyalty or dishonesty on the part of the producer towards the insured, an insured is entitled to place trust and confidence in the producer. [7]  Maryland law also imposes a “special relationship” heightened duty of care on insurance producers who have a trusted long-term relationship with the insured. [8]  In determining whether this heightened duty applies, Maryland courts examine whether the insurance producer (i) exercises broad discretion to service the insured’s need, (ii) counsels the insured about specialized insurance coverage, (iii) holds himself out as a highly skilled insurance expert and the insured relies upon such expertise, and (iv) receives compensation, above the customary premium paid, for the expert advice provided. [9] Adoption of the Fiduciary Standard would undermine established case law and complicate the producer/customer relationship.

In addition, opponents of SB 786 argued that the National Association of Insurance Commissioners (the “NAIC”) is the appropriate rule-making body to address a uniform standard for insurance producers. The NAIC has been working on a best interest standard for insurance annuity transactions for two and a half years and is expected to adopt a revised version of its Suitability in Annuity Transactions Model Regulation #275 (the “Model Reg”) sometime in 2020. [10]   The proposed revisions to the Model Reg incorporate a best interest standard that requires producers, when making an annuity recommendation, to act in the best interest of the consumer under the circumstances known at the time the recommendation is made, without placing the producer’s or the insurer’s financial interest ahead of the consumer’s interest. [11]  Under the proposed Model Reg, a producer is deemed to have acted in the best interest of the consumer if they satisfy specific enumerated requirements related to care, disclosure, conflicts of interest and documentation. [12]  This way, consumers can better understand why a particular product is consistent with their needs, situation, and objectives. [13]    If the revised Model Reg is adopted, states may elect to adopt the new rules sometime in 2020. [14]  

II.  Insurance Producers Would Be Subject to Dual Regulatory Oversight.

Maryland insurance producers are currently subject to a comprehensive and consumer-focused regulatory framework that is overseen by the Maryland Insurance Administration (the “MIA”). The MIA is responsible for providing efficient, effective service to both the consumers of insurance products and the insurance industry. It seeks to assure fair treatment of consumers by investigating consumer complaints concerning insurance companies operating in Maryland. The MIA is also responsible for issuing insurance producer licenses, investigating acts of insurance fraud, conducting financial examinations of insurance companies, and conducting market conduct examinations to ensure compliance with Maryland’s insurance laws. [15]

Under SB 786, the Fiduciary Standard would be regulated by the Maryland Securities Commissioner in the Division of Securities within the Office of the Attorney General, which has no experience in and no current jurisdiction over the insurance industry. Since the MIA already has great authority to take enforcement actions against insurance producers [16], subjecting insurance producers to dual regulatory oversight between the MIA and the Office of the Attorney General would not provide any meaningful added benefit to insurers. The MIA should be able to continue to enforce these existing regulations without undue interference from other government agencies with little experience in the insurance industry.  

Furthermore, opponents of SB 786 argued that little or no consideration was given to the repercussions of applying the Fiduciary Standard to insurance producers.  Maryland is one of the first states to attempt to expand the Fiduciary Standard beyond the securities industry.  The insurance and securities industries are very different, particularly in the way they handle consumer disputes. Securities disputes are typically handled through FINRA’s arbitration process, which can take over a year to complete.   The MIA, however, is quick to take administrative action regarding insurance disputes and insureds also have the ability to pursue litigation against the insurance producers.   Applying investment-specific rules to the insurance industry makes little sense without first engaging in meaningful research and discussion regarding the two separate industries.  

III.  A Heightened Fiduciary Standard Would Not Improve the Consumer Experience and Would Limit Consumer Options.

Maryland currently has a robust set of statutory regulations that protect consumers entering into insurance contracts with insurance producers. Specifically, Title 10 of the Insurance Article (“Title 10”) regulates the conduct of insurance producers and imposes a plethora of violations if a producer is, among other things, untrustworthy, incompetent, dishonest, or commits fraud. [17] There is also recourse where the producer is not or does not intend to carry on business in good faith. [18] Title 10 gives the Maryland Insurance Commissioner the authority to deny, suspend, revoke, and refuse to renew or reinstate an insurance producer’s license, order restitution to the party harmed, and impose an administrative penalty. [19] The MIA has also adopted regulations relating to premium accounts and commingling of funds. [20]

Adopting an additional fiduciary standard would increase the costs and legal exposure of insurance producers without providing a commensurate and meaningful benefit to insureds. Insurance producers are currently heavily regulated and are already expected to carry out their duties in good faith. Furthermore, there are an immense amount of ways that insurance producers can be held accountable for any predatory practices against their customers, as provided in Title 10. 

In addition, subjecting insurance producers to the Fiduciary Standard would end commission-based sales since fiduciaries are generally not allowed to represent the buyer and also be paid commission by the seller in the same transaction. Without access to commission-based products, the resulting fee-based only model could put certain retirement products out of reach for many households who don’t meet the minimum asset threshold for fee-based services.  Insureds who may prefer to set up less expensive, commission-based accounts over which they have greater control would be required to switch to a fee-based structure.

IV.  Conclusion

If Maryland moves forward with any future iteration of SB 786, it is recommended that, at the very least, insurance producers be excluded from its scope. Insurance producers are already subject to a common law duty of care and are heavily regulated by the appropriate state regulatory body which are informed by well thought out model laws and regulations developed at the NAIC. Any rule that makes it more difficult for producers to provide customers with top notch service is counterproductive and would ineffectively disrupt a fully functioning industry. 

Mr. Lininger, as a lobbyist for Old Line Government Affairs, LLC, represented Independent Insurance Agents of Maryland before the Maryland General Assembly in connection with its opposition to SB 786.

[1] Financial Consumer Protection Act of 2019, Senate Bill 786 (2019). 

[2] An insurance producer is defined as “a person that, for compensation, sells, solicits, or negotiates insurance contracts, including contracts for nonprofit health service plans, dental plan organizations, and health maintenance organizations, or the renewal or continuance of these insurance contracts for: (i)  persons issuing the insurance contracts; or (ii)  insureds or prospective insureds other than the insurance producer.” Md. Insurance Code Ann. Section 1-101(u). 

[3] SB 786, Section 5.  

[4] Opponents of SB 786 included the American Council of Life Insurers, the Independent Insurance Agents of Maryland, the Insured Retirement Institute, the League of Life and Health Insurers of Maryland, the Maryland Consumers Best Interest Coalition, the Maryland Insurance Administration, and the National Association of Insurance and Financial Advisors of Maryland. 

[5] Nevada adopted regulations that establish a fiduciary standard for broker-dealers and investment advisors in 2017 (Nev. Rev. Stat. Ann. § 90.575; Nev. Rev. Stat. Ann. § 628A.010; and Nev. Rev. Stat. Ann. § 628A.020). Other states are also considering similar regulations, including New Jersey (Proposed Rule PRN 2019-044, 2019) and Massachusetts (proposed amendments to 950 CMR 12.204, 950 CMR 12.205, and a newly proposed rule 950 CMR 12.207) for financial advisers and brokers. New York adopted a “best interest” standard for licensed life insurers and producers in 2019 (11 NYCRR § 224 et. seq.).  

[6] Sadler v. Loomis Co., 139 Md. App. 374, 395 (Md. Ct. Spec. App. July 5, 2001) (citing Insurance Co. of No. America v. Miller, 362 Md. 361, 386 (2001)).  See also Jones v. Hyatt Insurance Agency, Inc., 356 Md. 639, 657-58 (1999); Bodley v. Middleton Tavern, Inc., 288 Md. 645, 650 (1980).   

[7] Popham v. State Farm Mut. Ins. Co., 333 Md. 136, 153 (1993). 

[8] Sadler, 139 Md. App. at 392.  

[9] Id.  

[10] On December 30, 2019, the Life Insurance and Annuities (A) Committee adopted revisions to the Model Reg.  The NAIC’s Executive Committee and Plenary will hold a joint meeting on February 13, 2020 to consider the Model Reg.  

[11] NAIC Model Laws, Regulations and Guidelines 275-1et. seq. (Draft: December 30,2019).

[12] Id. 

[13] Id. 

[14]John Hilton, NAIC Annuity Sales Model Law Teed Up For Dec. 30 Adoption NAIC Annuity Sales Model Law Teed Up For Dec. 30 Adoption (2019), https://insurancenewsnet.com/innarticle/naic-annuity-sales-model-law-teed-up-for-dec-30-adoption#.XiHXk-Qm7oo (last visited 2020).

[15] Md. Code Ann., Ins. § 2-101 et. seq

[16] Md. Code Ann., Ins. § 2-201 et. seq

[17] Md. Insurance Code Ann. Section 10-126(a) et. seq

[18] Id. at 10-126(a)(14). 

[19] Id. 

[20] Code of Maryland Regulations Section 31.03.03.
 

References