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How to Prevent Becoming the Next ‘Annuity Burglar’

Today’s business environment requires more than high sales to be a top producer. In addition to working persistently to grow their books of business, agents must make certain they are always in compliance with applicable laws and regulations. By integrating compliance-related activities with their business routines, producers can strengthen relationships with their clients and the carriers they represent.

Most important, they can avoid the fate of Alan S. Lewis, a former life and annuity agent in Riverside County, Calif., who transferred more than $30 million into annuities over a six-year period through February 2009.

Lewis has been charged with 29 felony counts related to alleged “twisting” of annuities, which prosecutors say caused seniors to lose more than $300,000 in surrender penalties. Burglary is among the charges because some of the transactions occurred in clients’ homes. A succession of unfortunate circumstances (business reversal when the financial crisis hit, son with an addiction problem, race to an Al-Anon meeting to cope with son’s problem and speeding violation committed en route to meeting) led to Lewis’ arrest in Houston, where he had relocated, and extradition to California. Since late February, Lewis had been awaiting a trial in jail because he was unable to post $600,000 bail.

Although one could argue that Lewis is the victim of hard luck, ignorance among lawyers and judges about how annuities work, and a district attorney’s aggressive attempt to win re-election by making “elder abuse” a focus of his campaign, producers are more vulnerable to this kind of scenario than they may want to believe.

When selling annuities and all other insurance products, it is imperative that producers have a thorough understanding of the laws and regulations governing requirements related to fees and commissions, disclosures, electronic funds transfers, referral fees, rebates and inducements, recordkeeping, communications, suitability, and verification.

In Lewis’ case, he admits that he did not understand the complexities of a two-tiered annuity that is at the root of the charges against him. He thought the bonus would work as it did in a single-tiered annuity. But that turned out not to be the case, and he is being made an example by the California criminal justice system.


Help Is Near

To avoid Lewis’ fate, producers should tap into the knowledge of the compliance departments of the carriers they represent. The professionals who staff these departments are ready and willing to help agents in the field adhere to the letter and spirit of applicable regulations and laws. Given compliance professionals’ many responsibilities, however, producers should take the initiative to inquire about laws and regulations on a regular basis (e.g., monthly, every other month, quarterly).

When dealing with compliance professionals, producers should ask specific questions about legal requirements pertaining to the products they represent.

If inquiries become too numerous and compliance departments find themselves overwhelmed with questions from producers, carriers can consider adding or expanding the FAQ pages on their websites. Carriers also can hold webinars to allow producers to interact with the moderator as well as with one another to gain insights to best practices. Some carriers have portals on their compliance software that are accessible to “external” employees and third parties, giving producers yet another way to acquire vital information easily. Producers also may take advantage of continuing education courses, which are often available through carriers or state departments of insurance. 

For protection in civil matters, producers should consider purchasing an errors and omissions (E&O) policy from a professional association such as Independent Insurance Agents & Brokers of America, the National Association of Professional Insurance Agents or the National Association of Insurance and Financial Advisors.

According to a recent survey, more than 86 percent of agencies have E&O policies in place. Unfortunately, in Lewis’ case, an E&O policy might not have helped, because they typically do not cover criminal charges.

Nevertheless, E&O policies are highly beneficial to most agents. According to the National Association of Professional Agents, one in seven insurance professionals will be named in an E&O claim at some point during their careers. The average claim is in excess of $22,000, plus legal fees that can total additional tens of thousands of dollars.

While Lewis remains behind bars as an apparent victim of political grandstanding – and of the judge’s, prosecuting attorney’s and court-appointed defense attorney’s ignorance of how annuities work – he serves as a reminder of how important it is for producers to protect their livelihoods with E&O policies.

Regardless of the verdict in Lewis’ trial, he will likely have a difficult time re-establishing himself professionally. As Lewis put it in a recent article by

InsuranceNewsNet’s Steve Morelli, “When you’re stuck in these situations and you can’t get out of jail, people assume you’re guilty, period.”


Lessons to Be Learned

To avoid Lewis’ fate, it is imperative that all producers have a thorough understanding of the products they are selling. As investor and philanthropist Warren Buffett said, “Never invest in a business you can’t understand.” From the perspective of a producer, if an annuity or life insurance policy is too complex for a producer to understand, he or she should “walk away” and promote intelligible alternatives instead. Given the vast number of options within and across carriers, there are always favorable choices available. It may take some extra work to find them, but the effort will be worthwhile in the long run.

When producers have a thorough understanding of the annuities and policies they are selling, they stand to strengthen their relationships with the carriers they represent and with clients. A producer, whether captive or independent, who gets into legal jeopardy becomes a liability instead of an asset to the business. That’s because his or her predicament results in the business incurring legal fees and experiencing reduced productivity and lower morale among colleagues. Producers’ legal troubles can also increase the difficulty of retaining and attracting clients due to distractions that result in less time being devoted to business development and account service and in damage to one’s reputation based largely or exclusively on rumor and opinion. As the old saying goes, “Perception is reality.”

Gone are the days when producers could thrive solely on their personalities and connections. In addition to being likable and presentable, today’s producers must be smart and aggressive to make sure they are always operating within the letter and spirit of applicable laws and regulations.

Producers should regard Lewis as an object lesson for the importance of knowing the features of the products they sell inside and out, forward and backward. His experience also suggests that just because a state department of insurance deems a product to be “legal” does not necessarily mean that a judge or jury will see things the same way.

While caveat emptor (let the buyer beware) is a well-known term among clients, caveat vendit (let the seller beware) should become ingrained in the routines of producers who seek to grow their books of business while preserving their good names and peace of mind.

Jerry Shafran is founder and chief executive officer of Compliance Assurance Corp. The Pittsburgh-based company delivers highly integrated solutions that automate and simplify tasks related to compliance in the insurance industry. Jerry may be contacted at [email protected] [email protected].

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