From Independent Agent, February 1997

Remember the federal crime bill of 1994? If so, it's probably more for inter-party bickering about midnight basketball and banning assault weapons than because of its relevance to independent agents. But buried within the Violent Crime Control & Law Enforcement Act of 1994 were insurance-fraud provisions that might make you want to take a second look at your employee records. That's because, starting with the law's enactment in September 1994, it's illegal for anyone who has been convicted of a felony involving breach of trust or dishonesty to engage in the business of insurance.

What's more, the law defines the business of insurance so broadly that it pertains to nearly everyone in a typical office. Specifically, it includes not just the writing of insurance, but also "all acts necessary or incidental to such writing...and the activities of persons who act as, or are officers, directors, agents or employees of insurers or who are other persons authorized to act on behalf of such persons." In other words, the felony provision applies to, among others, agents, directors, officers, administrative and support staff.

So, just how well do you know that new employee two doors over?

The Clause's Cause
What's this language about insurance workers' backgrounds doing in a crime bill? After more than five years of hearings about insurance company failings, Congress decided that existing state regulations couldn't prevent the kind of fraud that led to bankruptcies. To help prevent more such fraud, they concluded, the federal government needed to get involved in winnowing the insurance industry's employee base. Hence, the prohibition against breach-of-trust felons, as well as the law's stipulation of penalty for anyone who "willfully" permits such a person to work in that vaguely defined "business of insurance." That is, hire someone with a record of this type of felony, even if it's only to provide computer support, and you've violated federal law. In either case, the penalties are steep, including the possibility of up to five years' imprisonment.

Under the 1994 law, someone convicted of an applicable felony may reenter the business in a given state by receiving a waiver from that state's authorized insurance regulator. The New York Insurance Department, for example, has granted four such exemptions to date—two to agents, one to a company employee and one to a person seeking employment in the industry. The state regulator followed administrative procedures similar to those used in cases of license revocation and appeal. In each case, the burden of proof was on the applicant, who had to give a certificate of conviction and record of post-conviction activities, which the insurance department was then free to investigate and question.

What happens is this person then wants to practice in another state? Nobody knows, just like nobody is sure about a single standard for defining what exactly is meant by "criminal felonies involving dishonesty or breach of trust." Courts haven't made this clear, leaving each state to devise a way to implement the federal law.

Given the ambiguity of the legislation's language, it's not surprising that some agents are troubled by it. For example, Les Bushmann, executive vice president of the Missouri Association of Insurance Agents, in Jefferson City, Mo., worries about how the act will affect his member agencies' hiring practices. Out of fear of running afoul of the legislation's murky wording, he points out, "our members/employers are required to understand the meaning of convictions for 'dishonesty or breach of trust,' be the act's policemen and prevent such 'felons' from acting as independent insurance agents."

Also of concern for agents is the extent of carrier involvement in this issue. Companies, too, can be held accountable for the felonious past of any of their agents, and at least one insurance company that IIAA knows of, Western Surety Co., has requested that its agents advise it "if they have been convicted of any felony, or a violation of 18 U.S.C. § 1033."

"We don't begrudge the companies their right to their own due diligence," says Todd Muller, AAI, IIAA's assistant vice president of consumer and technical advocacy. "But we are concerned if there is no assurance by the carrier that it will keep the information confidential of that it will limit the use of that information to the enforcement of this law. One possible solution is to make this background check part of states' licensing procedures, so neither companies nor agencies would have to shoulder the responsibility. Once a valid license was issued, an assumption could be made that the individual was in compliance."

Splitting Hairs
There are two types of hires to consider in terms of this legislation. The first involves current employees. Understand that an agency employer can't be held to be in violation of the act in regard to current employees unless he or she "willingly" allows applicable felons to work for the agency. If an employee's job application doesn't contain information about past convictions (and assuming that the employer has no other knowledge of an employee's criminal past), the employer doesn't have what the law terms "actual or constructive knowledge" of that employee's criminal history, and presumably couldn't be found to have "willfully" allowed that employee to work in violation of the law. Will the courts accept this simple "I didn't know" defense, or will they determine that the employer has an obligation to determine an employee's criminal past? Unfortunately, the act isn't specific as to what steps an employer must take to protect herself.

But Bushmann is concerned about more than the walking-on-eggshells hiring practices that the law's uncertainty necessitates. He believes that "to apply this act to independent insurance agents is an unnecessary and unwarranted intrusion by the federal government into the business of our members." Keep in mind why the anti-felon language was included: to prevent major insurance companies from going bankrupt. "What," Bushmann asks, "does the conviction of a few insurance agents have to do with driving failed insurance companies into insolvency? Independent agents do not, cannot, cause the insolvency of an insurer, no matter how many felonies the agents commit."

"Let's face it," says Muller, "the overwhelming majority of independent agents and their employees are upstanding citizens and valued community leaders. The act will have no bearing on them whatsoever. But we feel obligated to alert our members about the act to protect those few who may unknowingly be affected."

A similar desire to clarify the act's intentions and definitions—and therefore remove independent agents from its reach—is on IIAA's Capitol Hill agenda. Says Maria Berthoud, senior Washington lobbyist for IIAA, "We're planning to address this weak and confusing language in the new Congress. We believe that the law, as it's worded now, can cause unfair regulation." Beginning in February, Berthoud and her colleagues will meet with Rep. Tom DeLay (R-Texas) and Sen. Don Nickles (R-Okla.) to change the language through the regulatory-corrections procedure. "We look a this as a regulatory burden," she says of the act's potentially unintentional, but nonetheless constraining, comprehensiveness.

The Current Course
"One wonders at the outset," Bushmann asks, "was the act intended to include agents?" That it shouldn't, of course, is the impetus behind Berthoud's efforts at regulatory reform. For now, however, the safest approach is to assume that it includes everyone even tangentially involved in that broadly brushed "business of insurance" phrase, and act accordingly.

To help agents do so, IIAA's technical affairs committee has prepared a seven-page fact sheet that addresses, in question-and-answer format, the key issues raised by the 1994 crime bill. A copy has been sent to each state association executive. If you want your own, send a request with a $15 check per copy to IIAA, Legal Dept., 127 S. Peyton Street, Alexandria, Va. 22314. An IIAA advisory sheet that contains suggestions on how to comply with the act is also available.

In addition, the National Association of Insurance Commissioners has established a working group on insurance fraud. It's working toward guidelines that will help state regulators decide who should receive waivers from the act's prohibitions, and how to discover current employees who may be prohibited by the act from working in the insurance business. At its most recent meeting on Dec. 17, the group assigned members to research and write the 12 items it had earlier decided on as crucial to interpreting how to implement the act. Yet despite this soon-to-emerge guidance, as well as the prospect of relief from Capitol Hill, it behooves agents to educate themselves on this issue, lest they find themselves penalized for violating laws they didn't even know existed.

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