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