The NAIC’s Antifraud Task Force met on Sunday, June 13, 2004, to discuss a draft of its controversial Fiduciary Responsibility of Insurance Producers Model Act. PIA first issued a request for NAIC revision of this model due to critical differences from state-to-state as to what state authority can create a criminal violation class. The NAIC agreed to the review, but a challenge during the March meetings by other producer interests as to why a model was needed halted the process. PIA had hoped to avoid such a challenge, well aware that the NAIC would come back with research to support their position. This, in fact, came to pass, as the NAIC presented a report detailing premium diversion cases from 19 different state insurance departments. While this study reported abuses by “producers as a class,” not specifically independent insurance agents, it solidified the NAIC’s position that such a model was needed. With “sword in hand,” the NAIC revised the charges to the Antifraud Task Force to include the production of a model in time for the September meeting, noting that the absence of this instruction was an oversight, not a change in policy.

That stated, the debate at the June meeting on this potential model legislation focused on Section 13, entitled Criminal Violations. In subsection B of this section, the model states:

“Failure by an insurance producer to remit fiduciary funds to the person or persons, to whom they are owed in a timely manner, is prima facie evidence of violation of this Act.”

This language is troublesome to say the least. First of all, the section does not address disputes, errors made in good faith, and other instances in which an agent may not be able to remit funds in a “timely manner.” Secondly, the model does not provide a “safe harbor” for agents who do not know to whom they are required to remit funds. This places an unreasonable burden on agents with a severe penalty for any perceived failure. For example, if a disagreement exists between an insurer and an agent as to how much money is to be remitted, liability would fall on the agent, even if the actual error were on the part of the insurer. This is clearly a problematic section.

In response to agent concerns over the rigidity of the model, the NAIC’s Antifraud Task Force provided examples and statistics of premium diversion cases from 19 states. Citing these examples, the task force stated that the model needs to be strict to prevent such abuses in the future. The task force believes that the phrase “to whom they are owed” eliminates the problem of an agent’s inability to determine how much and/or to whom funds are owed. It is when the agent makes this determination that the clock would start to toll on the agent’s action. According to the task force, prosecutors would review the facts of the case to see under what circumstances the failure to remit the funds in a timely manner occurred. If the facts show that the agent acted in good faith and was merely uncertain how to proceed, the prosecutor would not prosecute the agent. This “solution” is unacceptable, however, because the model itself does not contain any such guarantee. Leaving interpretation of the model to prosecutors would lead to lopsided application of the provisions of the model and a climate of uncertainty over agents trying their best to abide by its rules.

What It Means to Agents:  At this point in the process, the Fiduciary Responsibility of Insurance Producers Model Act is merely a draft. PIA and other industry representatives will continue to work with the NAIC to improve the model’s language. It must be noted, however, that the Antifraud Task Force is focused on eliminating premium diversion and other instances of fraud perpetrated by a few “bad apple” agents. Agents should review their handling of fiduciary accounts and funds to prepare for future laws addressing these activities.

June 22, 2004