Insurers And Agents Cannot Be Good Samaritans In Hiring Under Federal Law

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Based on a 2010 study, it is estimated there are 23,000,000 convicted felons in the United States. In 2010, Massachusetts passed a law prohibiting employers from asking job applicants in an initial application if they had been convicted of a crime.

In passing this law, the Legislature sought to prohibit someone, who had paid their debt to society, from being denied an opportunity to turn their lives around simply because job applications made them disclose their conviction before they could talk with a prospective employer.

Insurance agencies, insurers, and other persons involved in the business of insurance are in a different position, however, and should take heed before hiring someone with a criminal record.

An insurer or agency cannot employ anyone with a felony for dishonesty or breach of trust

The reason insurers, agencies, and persons involved in the business of insurance must act differently with respect to a candidate with a criminal record, stems from the federal “Violent Crime Control and Law Enforcement Act of 1994.” (18 USC § 1033).

Under this law, it is a federal crime for a person to engage or participate in the business of insurance, if that person has ever been convicted of a state or federal felony involving dishonesty or breach of trust.

In addition, any agency, insurer or person involved in the business of insurance commits a separate crime by knowingly allows or permits “the participation of such a person in the business of insurance.”

Although Massachusetts law prohibits employers from initially asking prospective job applicants whether they have ever been convicted of a crime, there is an important exception that is:

if the applicant is applying for a position for which any federal or state law/regulation creates a mandatory or presumption of disqualification based on a criminal conviction.”

The federal prohibition, against anyone convicted of a felony involving dishonesty or breach of trust working in the business of insurance, would seem to fit squarely within this exception. As such, insurance agencies or insurers should be able to ask about felony convictions notwithstanding the Massachusetts statute to comply with federal law.

However, a person with such a conviction can apply to the Commissioner of Insurance, through a committee in the Division of Insurance, for a waiver to work in the insurance industry.

Federal act applies to insurers and agencies but also to other businesses

The statute broadly defines the insurance business to mean: “the writing of insurance or the reinsuring of risks by an insurer.”  However, the statue is not limited to just insurers.  The act applies to “all acts necessary or incidental to such writing or reinsuring and includes 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; . . .”

The term “other persons authorized to act on behalf of such persons” involves persons other than just licensed producers for agencies. This is so because the phrase “business of insurance” is defined in the statute, § 1033(f)(1), to mean:

(A) the writing of insurance, or

(B) the reinsuring of risks, by an insurer.

“including all acts necessary or incidental to such writing or reinsuring and the activities of persons who act as, or are, officers, directors, agents, or employees of insurers or who are persons authorized to act on behalf of such persons.”

How far does “all acts necessary or incidental to writing insurance” reach?

The terms “engages in the business of insurance,” “participates in such business,” and “all acts necessary or incidental to writing insurance” can apply to lot of areas relating to insurance where a person would never believe they were subject to the statute.

In one criminal case a defendant claimed this definition was unconstitutionally vague because the phrase “engages in the business of insurance” and “participates in such business” are not defined and thus, is unduly broad as it could apply to anyone with its language arguably including secretaries, support personnel and other individuals not directly engaged in placing insurance.

While the federal court ultimately ruled against the defendant, the court did not dispute that there was some ambiguity in the statute because of the breadth of its terms.

In another case, a person convicted of issuing bad checks twenty years before starting a business was involved in a subsequent lawsuit. His business developed forms and software for issuing title policies. He did not sell or place insurance nor work for an agency or insurer.

When he sued a company for interfering with his contract for the sale of the title insurance software and forms, that company counterclaimed that the contract was void because his bad check convictions prohibited him from legally participating in the “business of insurance” without a waiver from the Commissioner of Insurance.

His claim he was not “participating in the business of insurance” was denied. The court stated that when he had designed insurance forms and databases which an agent then used to create insurance forms, he was not merely a seller of software instead he was involved in the business of insurance by creating legally binding contract language. Since he had obtained no waiver from the Commissioner of Insurance of his state, to participate in the business of insurance, the court found the contract was void because of the federal statute.

In another case, involving a United States Congressman convicted under another part of the same statute dealing with insurance fraud, the Congressman argued that his acts were not acts “necessary or incidental to the writing of insurance.” The court, however, noted that besides marketing, developing and selling insurance policies:

• the issuing of certificates of insurance to clients;
• the collecting of insurance premiums from clients; and
• reporting claims to an insurer

could all be “necessary or incidental to the writing of insurance” under the statute.

Under this interpretation by the court, peripheral companies such as policy rating companies, premium finance companies, claim service companies, or first notice companies with other similar companies would probably fit within the definition of doing business or conducting matters incidental to the writing of insurance.

If the statute applies to persons who provide ancillary services to the insurance industry by classifying them as engaged in the business of insurance, any persons having a felony conviction for a crime involving dishonesty or a breach of trust, and working without a waiver from the Commissioner of Insurance could find they, at a minimum, have no right to enforce any contract involving their services.

CORI (criminal offender records information) background checks

Insurance companies routinely check criminal records of potential employees to ensure that they do not run afoul of this law.  Agents, however, rely more on the licensing of producers where the standard NAIC application asks criminal history questions in compliance with this federal statute.   But, in this case agents and other companies that may be subject to the statute, would do well to check the criminal records of all employees.

Insurance employers should note there is no time limit on the prohibition against employing persons convicted of a felony involving dishonesty or breach of trust. Under the Massachusetts Criminal Offender Record Information system, felony convictions are included in CORI reports only for ten years after final disposition (including termination of any period of incarceration).

Only if an offender has at least one conviction still timely for reporting purposes, will felony convictions older than ten years be reported.

How do you know what is a felony?

The violations of law classified as felonies vary by jurisdiction. Under Massachusetts law, a felony is any crime that carries a sentence to state prison. The crime may also allow for a lesser sentence than state prison. However, even if a person only pays a fine, is given a term of probation or a suspended sentence, if the crime had the possibility of a state prison sentence that person has been convicted of a felony. If the crime involved dishonesty or a breach of trust that person needs a waiver from the Commissioner of Insurance to work in the insurance industry.

For federal crimes, any violation of federal law that carries a sentence over one year is a felony. Likewise, if a person was convicted of a federal crime with the possibility of a sentence upon conviction of over one year that person has been convicted of a felony. If the crime involved dishonesty or a breach of trust that person also needs a waiver from the Commissioner of Insurance to work in the insurance industry.

How do you know a felony involved dishonesty or breach of trust

The federal statute does not define “dishonesty” or “breach of trust.” However, the NAIC, in its guide for insurance commissioners with regards to this statute, lists the following as examples of crimes involving these elements:

1. Any fraud, including insurance fraud, mail fraud, mortgage fraud;
2. Medicare fraud, land fraud, tax fraud, securities fraud, or other criminal fraud;
3. Counterfeiting or passing counterfeit money;
4. Giving or receiving a bribe;
5. Any crime involving false pretenses;
6. Money laundering;
7. Extortion;
8. Forgery or any crime involving the falsification of documents;
9. Embezzlement;
10. Criminal impersonation;
11. Fraudulent conveyance of property;
12. Fraudulent use of credit or debit card;
13. Knowingly issuing a bad check;
14. Any crime involving the making or utterance of a false statement;
15. Perjury and subornation of perjury;
16. Knowingly possessing a forged instrument;
17. Knowingly receiving or possessing stolen property;
18. Theft by deception;
19. Witness/evidence tampering; and
20. Crimes of financial exploitation

Waiver to work in the “business of insurance” from the Division of Insurance

The Massachusetts Division of Insurance Bulletin “1998-11 The Federal Violent Crime Control and Law Enforcement Act of 1994” sets out the procedures for a person applying for a waiver to work in the insurance business. This procedure involves applying to an advisory committee that reviews applications and allows applicants to meet with them in order to explain why they believe that the Commissioner should grant them written consent.

Standards for waiver recommendation

Any applicant for a 1033 waiver must show the committee and the Commissioner he or she is sufficiently trustworthy and suitable to participate in the business of insurance without being a risk to consumers or insurers notwithstanding their commission of one or more crimes involving dishonesty or breach of trust.

The Commissioner has complete authority to grant or withhold written consent. However, at least one applicant, to the author’s knowledge, has successfully appealed a denial by the Commissioner to the Superior Court.

The factors the applicant must address for the committee and the commissioner include:

1. the nature and severity of the offense and sentence;
2. the date of the conviction;
3. the injury and/or loss caused by the act for which the prohibited person was convicted;
4. whether the crime related to the business of insurance;
5. whether the prohibited person received a pardon from the sovereign that convicted him or her, and the reason for it;
6. whether the prohibited person successfully completed parole or probation without incident;
7. the nature and strength of any letters of recommendation and other evidence of rehabilitation;
8. the prohibited person’s business and personal record before and after the commission of the crime convicted of;
9. the nature of any consumer complaints in the DOI’s possession or reported by the applicant;
10. whether and to what extent the prohibited person has made material false statements in any license application or in any other documents filed with the Division and/or the Committee; and
11. whether and to what extent the prohibited person has made material false statements in any application or in other documents filed with any other state or federal agency.

Contacting the Division of Insurance

More information on the 1033 Consent Application Procedure can be found on the DOI website.

The application for anyone applying to the commissioner of insurance for a 1033 waiver can be found here: 1033 Waiver Application.