Professional Ethics in Michigan Practice: Worked Cases

Michigan writes a producer’s ethics into the law you are studying. Chapter 12 conditions your license on good moral character (MCL 500.1239(3)) and reaches “fraudulent, coercive, or dishonest practices” and “untrustworthiness” (MCL 500.1239(1)(g)). Chapter 20 governs how you sell. Chapter 45 makes insurance fraud a felony. The eight cases below apply those chapters to the duties you owe clients, insurers and the public.

Work each case the same way:

1. Duty. Name who is owed what, and find the provision.
2. Application. Test the facts against the provision’s words.
3. Exposure. State what could follow.
4. Better course. Say what the producer should do instead.

Two reading notes. Chapter 12 uses “agent” to mean an insurance producer (MCL 500.1201(a)), so “agent” means you. Older sections say “commissioner,” and the Director of DIFS holds that authority now. The cases draw on several lines of insurance, and a rule limited to one line is marked as such.

Duties to Clients

Premium in the Operating Account

Dana Reyes runs a one-person agency. Payroll is due Friday, so she deposits several clients’ premium checks in her operating account, planning to forward the money next week.

1. Duty. An agent is a fiduciary for all money received as an agent (MCL 500.1207(1)). Premiums must be segregated from the agent’s own money (MCL 500.1207(2)) and kept in a separate account at a federally insured institution (MCL 500.1207(3)).
2. Application. The deposit is commingling the moment it is made. The statute’s only allowance runs the other way: she may put her own money into the separate account for the initial deposit and for the institution’s charges or fees. If the money reaches the insurers late, that failure is prima facie evidence of a breach (MCL 500.1207(8)). Spending it on payroll is misappropriation (MCL 500.1239(1)(b)). Her plan to forward the money next week changes none of this.
3. Exposure. Probation, suspension or revocation (MCL 500.1239(1)), and, after an opportunity for a hearing, a civil fine of up to $5,000 per violation for someone who knew or reasonably should have known, up to $50,000 in one order, and restitution (MCL 500.1244(1)(a), (c)).
4. Better course. Deposit each check in the separate account, record the date, payee, amount and a description (MCL 500.1207(6)), and remit on time. For a Medicare supplement policy, a line-specific rule goes further: she may not accept a check made payable to herself instead of the insurer, and she must immediately give a written receipt (MCL 500.1207(9)).

The Incomplete Comparison

Marcus Hale, a life producer, shows a client her whole life policy beside one he sells. He highlights the larger death benefit and leaves out that she would surrender her cash value to pay for it. When she hesitates, he says her insurer “won’t be around much longer,” with nothing to support it.

1. Duty. The client is owed the whole picture. MCL 500.2064(2) bars any misrepresentation or incomplete comparison made to induce a policyholder to lapse, forfeit or surrender a policy and take one out with another like insurer. MCL 500.2005a(a) and 500.2005(f) reach the same conduct, and an omitted material fact is enough.
2. Application. Every printed number may be true and the comparison still incomplete. Marcus knows what he left out, which meets the “knowingly” of MCL 500.2005a(a). The remark is a separate violation if it is false, or maliciously critical of or derogatory to the insurer’s financial condition, and calculated to injure the insurer (MCL 500.2009).
3. Exposure. On satisfactory evidence, and after notice and a chance for a hearing, the Director shall revoke his license, with no license again for 1 year (MCL 500.2064(3), 500.2068(1)). A violation is also a misdemeanor, with a fine of up to $2,000 per violation or county jail (MCL 500.2069), and the unfair-practice sections support a cease and desist order and monetary penalties (MCL 500.2038(1)).
4. Better course. Show what she gives up as well as what she gains, and leave her insurer’s finances out of it.

Duties to Insurers

The Cheaper Address

Elena Voss keeps her car at her city apartment. She asks her producer, Tom Brandt, to list her parents’ rural address on the auto application to lower the premium. He agrees.

1. Duty. An insurer’s appointed agent acts as its representative (MCL 500.1201(c)), and the insurer rates the risk on what the application says.
2. Application. Tom knows the address is false, and it changes the premium, so it is material. He means the insurer to rely on it, which supplies the intent to deceive. Preparing the application is a fraudulent insurance act (MCL 500.4503(a), (b)) and, if done to earn a commission, an unfair practice (MCL 500.2018). Elena’s request excuses nothing. A life applicant’s hidden tobacco use would be analyzed the same way.
3. Exposure. A felony of up to 4 years, up to $50,000, or both, with restitution. Because the two agreed, up to 10 years (MCL 500.4511(1), (2)). Tom’s license is also at risk (MCL 500.1239(1)(c), (f)).
4. Better course. Enter the true address, explain why, and decline to submit anything else.

Changing a Date After a Loss

On Monday, Sam Ortiz tells his producer, Lena Park, that his basement flooded on Sunday. He has no water backup coverage and asks her to record his request for it as made last Friday.

1. Duty. Lena owes the insurer honest records. MCL 500.4503(d) covers assisting, with intent to deceive, in preparing an oral or written statement, including computer-generated documents, in support of a claim, knowing it contains false information material to the claim.
2. Application. Whether coverage existed depends on the date, so it is material. A backdated system entry is enough.
3. Exposure. If Lena complies, the felony penalties in the last case apply to her. If she refuses, she has done nothing wrong, and she then faces a second question: whether to report.
4. Better course. Refuse, offer to request the coverage going forward, and note the call in the file. Chapter 45 does not require a report; MCL 500.4507(2) says “may notify.” If she does report, she should use a protected channel, such as the insurer’s fraud department (MCL 500.4501(e)). Absent malice, and unless she knows the information is false, she is protected (MCL 500.4509(1), (3)).

Coverage Her Insurers Refuse

Greta Lind’s insurers both decline a client’s warehouse. A friend says Ostrander Casualty would take it. Greta is not appointed there, but she is tempted to tell the client he is covered and fix the paperwork later.

1. Duty. A license alone gives no authority to commit an insurer (MCL 500.1201(h)), and a producer shall not bind coverage for an insurer that has not appointed her (MCL 500.1208a(2)).
2. Application. She has no power to bind, so her assurance would leave the client believing in coverage that does not exist.
3. Exposure. Violating an insurance law is a ground for license action (MCL 500.1239(2)(e)), and a dishonest assurance is another (MCL 500.1239(1)(g)). Civil fines run up to $1,000 per violation, or $5,000 if she knew or should have known (MCL 500.1244(1)(a)).
4. Better course. MCL 500.1207(12) gives her a path: obtain the refused coverage through another licensed agent or a risk sharing plan permitted by state law. If she uses another agent, she must advise the buyer in writing that the coverage is not in effect until he receives written evidence of insurance.

Duties to the Public

Covering the First Month

To win a homeowners policy, Rafael Ines offers to pay the client’s first monthly premium. He also gives clients a branded umbrella costing $30.

1. Duty. Buyers should get the bargain written in the contract. MCL 500.2066(1) bars any rebate or inducement not specified in the contract, on any kind of insurance, directly or indirectly. MCL 500.2024 says much the same for life, annuity, and accident and health contracts.
2. Application. Paying the premium is a rebate, even from his own pocket, and the section reaches the offer as well as the payment. The umbrella is different. A property-casualty producer may give merchandise costing the insurer $50 or less per calendar year (MCL 500.2024b). The life rule is narrower: an article with an invoice value of $5 or less to each applicant (MCL 500.2024a). Neither section names accident and health, so neither gives that line an allowance.
3. Exposure. Revocation after notice and a chance for a hearing, with a 1-year bar on a license (MCL 500.2066(2)), and a misdemeanor with a fine of up to $100 per violation or county jail (MCL 500.2069). A client who knowingly accepts has the insurance reduced in proportion, here by one twelfth on a twelve-month premium, and faces a fine of up to $100 (MCL 500.2070(2)).
4. Better course. Compete on service and coverage.

The Clinic’s Referral Fee

A clinic offers Paul Nowak a payment for each injured auto client he sends, and mentions that it bills the full treatment plan whether or not patients attend.

1. Duty. Clients trust a producer’s referral, and insurers and the public pay for false claims. A person who takes a benefit from a practitioner for procuring patients, in cooperation with a practitioner who intends to claim insurance benefits for the services, is a runner, capper or steerer (MCL 500.4501(h)).
2. Application. The offer fits the definition. A referral fee alone is not yet a fraudulent insurance act, because MCL 500.4503(h) requires intent to falsely or fraudulently obtain benefits. The billing remark narrows that gap: if Paul takes the money knowing the clinic bills for visits that never happen, those facts support the intent the section requires.
3. Exposure. The felony penalties of MCL 500.4511, and a court that finds a practitioner responsible must notify the licensing authority (MCL 500.4511(3)). Even without proof of fraud, steering trusting clients for pay invites a charge of untrustworthiness (MCL 500.1239(1)(g)).
4. Better course. Decline, and consider a report through a protected channel. The reverse also needs care. An agent may not reward any person for furnishing leads, apart from the exceptions MCL 500.1207(11) lists. MCL 500.1240(4) allows paying persons who do not sell, solicit or negotiate, but neither section says which controls for a lead, so check with DIFS before paying for one.

A Colleague’s Missing Premiums

Jo Whitfield, an officer of a licensed agency, finds that a producer has been holding client premiums in a personal account. He offers to repay them if she stays quiet.

1. Duty. The agency’s license depends on her response. It may be suspended, revoked or refused if a violation was known or should have been known to a partner, officer or manager, “and the violation was not reported to the director and corrective action was not taken” (MCL 500.1239(5)).
2. Application. She knows. Repayment alone leaves the matter unreported, so the safe course is to report and to correct. Premiums are fiduciary money (MCL 500.1207(2)), and diverting funds of other persons in connection with an insurance transaction, with knowledge and intent, is a fraudulent insurance act (MCL 500.4503(g)). This is more than a private debt between colleagues.
3. Exposure. Beyond the agency’s license, if an insurer terminates the producer for a reason listed in MCL 500.1239, it must notify the Director within 30 days following the termination’s effective date (MCL 500.1208b(1)). It sends him a copy within 15 days after that notice, by certified mail or overnight carrier, and he has 30 days after receiving it to file written comments (MCL 500.1208b(4)).
4. Better course. Secure the money in the separate account, tell the insurers, report to the Director and document each step. A report to the insurer’s fraud department or to DIFS, made without malice and without knowing it is false, has the protection of MCL 500.4509, and a report under MCL 500.1208b made without actual malice is protected (MCL 500.1208b(5)).

Lesson summary

• Work a case in order: duty, application, exposure, better course.
• Premiums are fiduciary money. Segregate them, record them and remit them on time.
• An incomplete comparison made to induce a replacement is a violation even if each stated fact is true.
• A client’s request does not excuse a false application or a backdated record. An agreement with the client raises the maximum prison term to 10 years.
• Chapter 45 permits reporting and does not require it. Protection depends on the absence of malice, on not knowing the information is false, and on using a listed channel.
• A license is not authority to bind. Refused coverage goes through another licensed agent or a permitted risk sharing plan, with written notice when another agent is used.
• Rebates are barred across the lines of insurance, apart from narrow exceptions such as the merchandise limits for property-casualty ($50 per calendar year) and life ($5 per applicant).
• An agency whose officer knows of a violation should both report it and correct it.