The Producer’s Role in the Health Insurance Sale

Producers play a central role in the sale of health insurance. The insurance company and the applicant rely on the producer’s knowledge, honesty, and observance of ethical standards. The insurer relies on the producer to collect the necessary information to underwrite the policy. It depends on the producer to give the applicant the required disclosures. The applicant wants the producer to recommend products best suited to the applicant’s needs and interests.

The purchase of a health insurance policy begins with the application for coverage.

Completing the Application

The application is the primary document that insurance underwriters use to determine the applicant’s risk. The applicant completes and signs it. The producer also signs it. The producer cannot change anything on the application. Only the applicant may change its information and must initial any changes.

An application for a health insurance policy typically asks for the following information: • names, sex, and ages of those to be covered by the policy • medical histories of those to be covered by the policy • whether other health insurance coverage exists • whether an insurance company has ever refused to issue a health insurance policy to the applicant • the preferred frequency (mode) of premium payment (monthly, quarterly, or annually)

Field Underwriting

As the insurer’s agent, the producer also acts as a field underwriter. The producer guides the applicant through the application form. This is to make sure that the applicant answers all questions.

The application contains a section called the Agent's Report. Here the producer explains the relationship with the applicant, how the producer met the applicant, and the purpose for the coverage.

A producer may need more information from these sources if the applicant discloses certain health conditions or other risk exposures: • MIB (formerly Medical Information Bureau) report • attending physician’s statement • credit or inspection report • Department of Motor Vehicles (DMV) report • hazardous activity questionnaires (concerning aviation activities, SCUBA diving, or auto, boat, or motorcycle racing, etc.) • additional medical exams (such as electrocardiogram, treadmill test, or physician examination)

If the application requires a medical exam, the producer must make sure the exam is scheduled.

Producers must also: • determine the suitability of the recommended product for the applicant’s needs and circumstances • disclose all relevant information about the policy • explain the sources of underwriting information • follow the insurer’s marketing and advertising practices • make product recommendations that are factual and accurate

The application must be complete and properly signed before it goes to the insurer. Otherwise, the insurer will not issue the policy.

Collecting Policy Premiums

The first premium payment usually accompanies the application for an individual health insurance policy. The completed application and the premium payment are the applicant’s offer to the insurer. The insurer accepts the offer by issuing the policy.

When the applicant submits the initial premium with the application, the producer gives the applicant a policy receipt. The receipt confirms the insurer's liability and its responsibility during the underwriting period before the policy is issued.

There are two types of receipts: 1. A binding receipt (or temporary insurance agreement) gives the applicant coverage during the underwriting period. Coverage takes effect when the application is signed. If the applicant turns out to be uninsurable, the coverage continues until the insurer notifies the applicant that it will not issue a policy. Even so, the insurer will cover claims that arise during the underwriting period. This is why insurers strictly control this kind of receipt. Binding receipts are more common with property insurance (like auto insurance). 2. A conditional receipt gives the applicant coverage from the date of the medical exam (if required) or the signed application—whichever is later. If the applicant turns out to be uninsurable, the insurer is not liable for claims during the underwriting period. It returns the premium to the applicant.

Policy Delivery

Producers should personally deliver newly issued policies to their customers. They should (and, in some states, must) review the policy with the customer to be sure that its terms and conditions match those the client applied for. If the policy is rated (charged more than the standard premium rate) or denied, the producer explains why. Personal delivery helps build the producer-client relationship.

Key Point

The customer can return the policy during the free-look period and receive a full refund of the premium. This period lasts for at least ten days after the policy is delivered.

If the applicant did not submit the initial premium with the application, the producer collects it while delivering the policy. The producer also gets the applicant’s signed statement of continued good health. This confirms that the applicant’s health has not changed since he or she completed the application. The statement becomes part of the application. So, the insurer can void the policy if it learns during the contestability period that the applicant lied when signing this form.

Producer Responsibilities

Producers have important responsibilities that require them to act in a professional manner and follow certain standards when: • asking for insurance applications • giving advice • receiving applications • sending applications to an insurer • accepting premium payments • issuing receipts for premiums

Doing the right thing for the customer helps producers avoid disciplinary action by their state insurance regulators and legal disputes with the policyowner’s attorneys.

Disclosure

Every state requires that certain disclosures be given to applicants during the application process. Disclosure forms describe the type of insurance product that the applicant is buying and help explain the coverage. For instance: • The Notice of Information Practices tells the applicant about the insurer’s right to collect information from sources beyond the application. It states how the insurer can share that information with third parties. • The Buyer's Guide explains the applicant's rights and responsibilities. • The Policy Summary outlines the policy’s coverages and benefits.

State Insurance Guaranty Funds

All states have a life and health insurance guaranty fund. This fund offers some financial relief to policyowners when their insurer becomes insolvent and cannot pay claims. Producers cannot mention the fund when selling insurance. This keeps them from giving the impression that their products are endorsed or guaranteed by the government.

Replacement

Replacing an insurance policy may be best for the customer. However, replacement can be illegal and unethical if it is not in the customer’s best interest or the producer obtained it through misrepresentation. A policy should not be replaced unless the replacement benefits the insured alone.

To ensure that a replacement is in the insured’s best interest, states require producers to find out whether an applicant wants to buy a policy to replace an existing policy and note the answer on the application.

If the applicant wants to replace a policy, the producer must give the applicant a Notice of Replacement. This notice states that: • The replacement will end existing coverage. • A new policy may impose new waiting periods and deductibles. • The applicant should contact the existing insurer to make sure the replacement is in the applicant’s best interest. • Failure to include all material medical information on the application can give the insurer reason to deny claims, void the policy, and refund the premium as though the policy had never been in force.

The producer gives one copy of the notice to the applicant. The insurer keeps another signed copy.

Errors and Omissions Insurance

Producers can get insurance to protect them while they conduct business. Errors and Omissions (or E&O) insurance covers injuries and damages that arise from services a producer gives or failed to give. • The typical E&O policy covers: • placement of policies with insurers that are not licensed or authorized to conduct business in a state • negligence (such as failure to deliver required documents) • failure to perform due diligence and other duties of a producer

An E&O policy covers the producer for the cost of the harm that resulted from the error or omission. The policy pays for the cost of defending the producer in a lawsuit filed against the producer. However, the policy will not cover willful fraud and other criminal acts.

For Your Review:

The insurer and applicant rely on the producer’s knowledge, honesty, and ethical standards in the sale of health insurance. • The application is the main document that the underwriter uses to assess the applicant’s risk. • Only the applicant can change information in the application. • As the insurer’s agent, the producer also acts as a field underwriter. • The completed application and premium payment are the applicant’s offer to the insurer to enter into a contract. • A binding receipt binds the insurer to the policy's terms during the underwriting process. It takes effect when the application is signed. • A conditional receipt holds the insurer to the policy's terms, effective from the date of the medical exam (if required) or the signed application—whichever is later—as long as the medical exam confirms the applicant is insurable.

QUIZ

Question 1

What is the effect of a binding receipt given to an applicant? a) It guarantees coverage during the underwriting period even if the insured turns out to be uninsurable. b) It gives conditional coverage during the underwriting period. c) It obligates the insurer to renew the policy at the insured's request. d) It gives permanent insurance protection.

Question 2

Which is NOT true about the delivery of health insurance policies? a) The producer typically delivers the policy to the insured. b) If a policy is rated or denied, the producer explains why to the applicant. c) If the application did not include the first premium, the producer collects the premium and a surcharge when delivering the policy. d) The producer should review the policy to ensure that its terms and conditions match those the client applied for.

Question 3

What happens if a person submits an insurance application without the first premium? a) The applicant made an offer to the insurer. b) The insurer must make an offer to the applicant. c) The applicant has made a counteroffer. d) The insurer must make a counteroffer.

Question 4

When acting in the best interests of applicants and insureds, producers must: a) explain the features and benefits of other insurers' policies b) help applicants get rebates for buying policies c) give all important information about a proposed policy d) avoid replacing any insurance policies