I will take personal blame for Arizona not having a “specific” fiduciary trust account. In the mid-1980’s I became aware that the Department of Insurances in at least three other states was being abusive with the enforcement of their “Trust Account” statutes. (Note: The Arizona Department of Insurance has never been abusive or “overzealous” in enforcement of the regulation of producer’s handling of fiduciary funds.)
The “abusive Departments” from three other states became aware how horribly complicated agency accounting can become in certain situations and realized that every agency is going to have an accounting error at some point and even if only for a day, there will be occasions where insurance companies and/or client monies will become “mingled” with agency monies. The “abusive Departments” would use such an error as a reason to suspend or revoke an agency’s license – even if there were no complaints from companies or consumers. An insurance department investigator from another state described this as his “magic bullet” for the obviation of agencies he could not otherwise find cause to take action. (Those were his own words.)
When I became aware of the possible abuse of power enabled by most “trust account” statutes I made a promise to myself that our Arizona agents would not be subject to this risk as long as I was able to prevent it. So far – we have defeated four attempts to incorporate “trust account” statutes in Arizona. IMPORTANT DISCLOSURE – While Arizona does NOT have an abusive Department of Insurance, we have no idea what will happen in future decades so we MUST view all legislative proposals from the worst possible scenario – thereby recognizing that at some point in history we may have a Director of Insurance that would allow or even encourage “abusive” practices against the industry.
We do have an existing Arizona Statute (ARS 20-295, Section A-4) that protects consumers and insurance companies by prohibiting an Arizona producer from misappropriation or conversion of fiduciary funds. Arguably, that is a form of “Trust Account” statute as it prevents the producer from conversion of company or client monies to their own use, but at the same time it does not mandate the producer’s segregation of ALL monies received into two different accounts. We have witnessed instances where a producer or agency has used fiduciary money for their own use and in those cases the Arizona Department of Insurance has taken regulatory action, including the revocation of their license(s) by use of this statute.
Having explained the lack of a specific Arizona Trust Account statute, allow me to explain why we cannot assume that Arizona producers need not segregate all funds into two accounts. We were informed in 2010 that the Federal Bureau of Investigation (FBI) was actively prosecuting an individual employee within an agency (financial officer) for failure to maintain a specific, dedicated “stand alone” account in which all “trust” monies were deposited. The producer involved informed our Association that the FBI was filing multiple felony charges against the individuals within the agency’s management with a possible sentence of eighty (80) years in a federal prison.
Obviously this was more than concerning to our Association, so we retained legal counsel to determine if the IIABAZ should become involved in some manner in the defense of this Arizona producer or if we should become involved as an advocate for ALL Arizona producers. The complexity of a Federal investigation and the fact that this was a criminal action not a regulatory action required advice and input from outside counsel. The IIABAZ retained former Arizona Director of Insurance and nationally recognized insurance regulatory expert S. David Childers with the task of determining “what” statutes the Federal prosecution was using, and to offer counsel regarding the advisability of our attempting to help the insurance producer who was subject to this action.
Through Mr. Childer’s communications with the Arizona producer’s defense counsel we learned that the FBI stipulated that there was not a specific Arizona statute that required the segregation of funds held by Arizona for insurance producers. However, the FBI was utilizing “Federal Insurance Fraud” statutes as the basis for their prosecution. As with all criminal cases, the exacting specifics of each case makes it difficult if not impossible to extrapolate from a specific prosecution how a case will impact an entire industry on a “blanket” basis. There were alleged extenuating circumstances that made it difficult if not impossible to come to the conclusion that the Federal Insurance Fraud statutes imposed a “Trust Account” requirement on Arizona producers. It was because of the extenuating circumstances and the fact that our Association’s involvement or lack of involvement would have no impact on the results of this case that our Association reluctantly “stood down” and did not take any further advocacy measures. Simply stated – no matter what the IIABAZ did or did not do – that specific case would have continued and our involvement or lack of involvement would have had no impact. The producer was convicted of multiple felonies and after the convictions but before sentencing, a plea arrangement was reached. It is my understanding that portions of that investigation and case are still ongoing but none related to the “trust account” or misappropriation of fiduciary funds issues.
So when asked now “IS THERE AN ARIZONA STATUTE REQUIRING PRODUCERS TO UTILIZE TRUST ACCOUNTS?” – I’m very reluctant to tell anyone “No”. Obviously... there are Federal Statutes that (depending on the circumstances) may be interpreted by some that may require one, as well as the existing Arizona Statute that prohibits misappropriation of funds.
In addition to specific laws regulating how producers handle “trust accounts” or fiduciary funds, it is important to discuss the contractual aspect of Trust Accounts. Almost every insurance company contract with their appointed agencies discourses several “mandates” that the agency agrees to follow regarding the handling of the company’s monies. Irrespective of what state or federal statutes may exist, you also need to review “what you have contractually agreed to do” when you signed the agreement with your insurance companies.
On multiple occasions I’ve had an insurance company approach our Association to request support for Arizona legislation which would mandate a “trust account”. We have explained our concern(s) about the potential regulatory abuse and have also reminded the insurance company (or companies) that as the drafter of their contract with their agents, they already have the option of directing the agent on how to “manage” their funds held in a fiduciary capacity by their agents. We also provide the “supporter” of a trust account statute with a copy of Arizona Revised Statute 20-295, which specifically addresses a producer’s misappropriation/conversion of fiduciary funds.
Usually this has been adequate explanation to satisfy the company, however, on more than one occasion our disagreement on how to address this issue has been taken to the Arizona Legislature in the form of a request for legislation to establish a “trust account”. One of the strongest arguments I’ve used when testifying in opposition to an Arizona Statute for producer trust accounts is that the insurance company has an obligation to become familiar with the agency that represents their company, and that as responsible businesses they have an obligation to exercise due diligence in “who” they appoint as their “agents”.
The strongest advocate for legislation was an insurance company that is known for appointing anyone who requests they be made an agent for that company. They have not become familiar with many of the agencies before they assign them as “agents” of their company. Honestly - don’t you feel it only reasonable that prior to giving someone authority to collect money on your behalf you research their history?
I’ve argued before legislative committees that the insurance company is asking the legislature mandate how producers handle insurance company money when they (the insurance company) already have the option to do so contractually in their agency agreement. If the insurance company wants the agency to segregate their funds in a special manner, they have the option of including that requirement in their agency agreement. Why should they ask the Legislature to “do something” that is already within the power of the insurance company to do themselves?
In my testimony I’ve also been very critical of some insurance companies who feel that a “Trust Account Statute” will magically replace their need or obligation for due diligence prior to their appointing agencies to represent them. One insurance company (who no longer exists) actually argued that they felt the State of Arizona should “pre-qualify” producers by their examination and licensing process. Really? The reason they were seeking legislation was because they appointed an insurance agency to represent them who was DISHONEST. The agency misappropriated money from insurance companies and policyholders. The agency had a history of being delinquent with almost every insurance company they represented, and it was well known within the insurance community that at the time the insurance company appointed the agency as a representative of their company that the Department of Insurance was already investigating allegations that the agency was misappropriating funds. Despite the existing statute(s), and despite the fact that the agency was already being investigated for their financial dealings – this insurance company appointed them to represent them and ENTRUSTED THEM WITH MONIES THEY COLLECTED ON THEIR BEHALF.
What difference would a “Trust Account Statute” have made? NONE. If the agency was dishonest and already in violation of existing statutes do you think additional “Trust Account” statutes would have made a difference? I testified that if there was an issue that deserved attention, it was the practices of an insurance company freely appointing anyone with any due diligence. The bill failed to get any support from the Legislature and I was removed from the insurance company’s annual holiday card list.
In summary to the simple question “DOES ARIZONA HAVE SPECIFIC TRUST ACCOUNT LAWS FOR PRODUCERS?” - the “qualified” answer is “No”. However, we do have statutes that prohibits the producer’s misappropriation or conversion of funds. It is also possible that in certain circumstances the Federal Insurance Fraud Statute(s) can be viewed as requiring segregated accounts for fiduciary monies, but that is criminal statue and does not provide specifics on how a producer should handle the accounting of trust accounts.
Arizona Revised Statute 20-295 – Section A-4 is the existing statute that the Department of Insurance has available to take action against producers who withhold, misappropriate or convert.
Author: Lanny L. Hair, CIC, RPLU, ARM, AAI - Executive Vice President
Independent Insurance Agents and Brokers of Arizona, Inc., Phoenix