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Penalties

Kansas Continues Lead Role in Advertising Sanctions

Thanks to my friend Alan Prochoroff, Editor and Publisher of Insurance Compliance Insight, for providing, in his September 9, 2013 edition, a brief discussion and link to the Summary Order issued by the Kansas Insurance Department (“KID”) on August 27, 2013. Mr. Prochoroff describes the issues succinctly as follows: “the postcards mislead recipients into believing their financial well-being may be in jeopardy. The postcards supposedly suggested the person had an annuity that might be adversely affected if they didn’t contact the company. Making matters worse was a disclaimer on the cards. Kansas said that language was in print too small to remedy the misleading language that was printed in a much larger font.” KID has also issued a Consumer Alert today (September 10) regarding the order.

We often hear in our practice that sanctions like this don’t happen and “everyone is doing it.” This suggests that if that is the case, “everyone” can expect to be hit with a penalty from KID. The order imposes a monetary penalty of $5,000 on Lead Generating Systems, LLC, aka Unlimited Fulfillment Services, aka Smart Leads. This is in addition to a previous penalty of $4,000 that remains unpaid. In addition to the monetary penalty, a cease and desist order was issued. The sanctions were based on the unfair trade practices law in Kansas. The Consumer Alert provides some additional details about the claims made in the postcards, namely that they stated recipients financial well-being was at stake because their annuities were purportedly at the end of the surrender charge period. 

Kansas has taken a lead role among state regulators in targeting lead generating as a source of problems in insurance advertising. In 2012, KID issued Bulletin 2012-1 specifically addressing issues raised by third party marketing firms.

One of the issues not addressed in this order is whether any producers who used these lead generating devices in their sales, any Independent Marketing Organizations who made the lead generating systems available or promoted them to their producers, or any carriers whose annuity contracts were issued to consumers who responded to the misleading claims on the cards will be sanctioned as well. It seems clear from the applicable laws and regulations that there is authority to find that once a misleading claim like those in the cards sent to Kansas residents, the entire sale is tainted and all along the line in the sales process are exposed to liability. Only time will tell if there are further repercussions. 

Tennessee Joins States with Advice on Permitted/Prohibited Activities Based on Licensing

In our Advertising and Distribution Compliance Department, we receive questions on this issue almost every day. Having guidance on what an “insurance-only” producer can and cannot do from the states is very helpful in framing those discussions. Tennessee now joins the small number of states providing that guidance in their Bulletin dated May 22, 2013, titled: Licensing and/or Registration Requirements and Permitted Activities.

Tennessee’s guidance is very similar to that first offered by Iowa in that the list of permitted activities clearly and explicitly includes the items that must be discussed to complete the suitability forms now mandated in most states and carriers.

From a producer’s perspective, some of the most important and difficult issues are raised in the following statements from the Tennessee Bulletin:

“In his or her general discussion about the expectations of the funds being considered to purchase the annuity or life insurance, the Insurance-Only Person may discuss: that the funds need protection from market risk; that the tax status of the funds and that tax deferral needs to be utilized or maintained; that the funds may be needed to provide a lifetime income stream; that the funds need to earn a guaranteed interest rate; or that there are other funds available during the surrender period of the annuity or life insurance for emergency or urgent needs and where those funds are located….”

This statement is completely reasonable, but in practice it puts the Insurance-only producer in the difficult situation of identifying assets that could fund an insurance product but then having to send the prospect elsewhere to liquidate them. That is a tough thing for anyone in sales to do, even if they know it is the right thing to do. As a result, in practice, there is a lot of pressure to find a way around these rules and we have often heard that no insurance producer has ever been disciplined for this type of source of funds issue. I am hopeful it won’t take such regulatory action to achieve widespread compliance, but it might. The Bulletin notes that the penalties could be license probation, suspension, and revocation, as well as fines of up to $10,000/violation.

For any producers operating on the assumption that this will not be enforced, I encourage placing a call to the Tennessee Insurance Department. Our opinion is that the DOI put the bulletin out because they are concerned about these issues and that operating on another assumption puts one’s livelihood at risk, not to mention one’s savings.