Delaware Producer Responsibilities and Conduct

Delaware law establishes comprehensive standards for producer conduct to protect consumers and maintain industry integrity. Producers must understand and comply with these requirements to maintain their licenses.

Fiduciary Responsibilities

Acting in Client's Best Interest

Producers owe fiduciary duties to clients:

Duty of Care:

• Provide accurate information and advice
• Understand client needs and circumstances
• Recommend appropriate coverage
• Explain policy terms, limitations, and exclusions

Duty of Loyalty:

• Act in client's best interest, not solely for commission
• Avoid conflicts of interest or disclose them
• Do not place business with insurers offering highest commission if not suitable
• Maintain client confidentiality

Duty of Disclosure:

• Disclose all material facts about policies
• Explain coverage limitations and exclusions
• Inform clients of changes in coverage or terms
• Provide copies of applications and policies

Handling Client Funds

Premium Handling:

• Premiums collected are trust funds (not producer's money)
• Must promptly remit premiums to insurer or agency
• Keep client funds separate from personal funds
• Account for all premium transactions

Prohibited Practices:

• Commingling client funds with personal funds
• Using client premiums for personal use (misappropriation)
• Delaying premium remittance to earn interest
• Failing to account for premiums collected

Exam Tip: Premiums collected by producers are TRUST FUNDS that must be promptly remitted to the insurer or agency. Misappropriation of client funds is a serious violation that can result in license revocation and criminal prosecution.

Record Keeping Requirements

Transaction Records

Delaware requires producers to maintain comprehensive records:

Minimum Retention Period: 5 YEARS

Required Records:

• Policy Applications: All applications and supporting documents
• Policy Documents: Policies, endorsements, and declarations
• Client Communications: Letters, emails, meeting notes
• Premium Records: Premiums collected, paid, and commissions earned
• Claims Documentation: Claims filed and communications with insurers
• Disclosure Forms: Signed acknowledgments and disclosures

Record Organization:

• Records must be organized and accessible
• Available for Delaware DOI examination
• Maintained in physical or electronic format
• Securely stored to protect client privacy

DOI Examinations

The Delaware DOI may examine producer records:

Examination Process:

1. Notice: DOI provides notice of examination (may be unannounced for cause)
2. Scope: DOI reviews transaction records, compliance, and practices
3. Cooperation: Producer must provide requested records promptly
4. Findings: DOI issues examination report with findings
5. Corrective Action: Producer must address deficiencies

Consequences of Non-Compliance:

• Failure to maintain records = license suspension or revocation
• Obstruction of examination = additional penalties
• Records violations may result in fines

Prohibited Practices

Rebating

Delaware Law on Rebating:

Prohibited:

• Offering or giving anything of value not specified in the policy to induce purchase
• Providing special advantages or inducements
• Offering premium discounts or cash kickbacks
• Giving gifts or services as inducements

Permitted Exceptions:

• Dividends: Legitimate policy dividends
• Value-Added Services: Educational materials, financial planning tools
• Promotional Items: Nominal value items (pens, calendars) under certain limits
• Group Discounts: Legitimate discounts for groups or associations

Penalties for Rebating:

• First violation: Warning or cease and desist order
• Willful violation: Up to $5,000 fine per violation
• Repeated violations: License suspension or revocation

Exam Tip: Rebating is generally prohibited in Delaware, but exceptions exist for dividends, value-added services, and educational materials. Offering cash or premium discounts to induce insurance purchases is ALWAYS prohibited.

Twisting

Twisting Defined:

• Inducing a client to lapse, forfeit, or replace an existing policy
• Through misrepresentation or incomplete comparison
• To purchase a new policy that is not in the client's best interest
• Typically motivated by producer's desire to earn new commission

Examples of Twisting:

• Misrepresenting an existing policy's terms or benefits
• Failing to disclose disadvantages of replacing a policy
• Omitting comparison of costs, benefits, and features
• Exaggerating benefits of new policy vs. existing policy

Legitimate Replacement:

• Full disclosure of existing and proposed policy terms
• Accurate comparison of costs, benefits, and features
• Recommendation based on client's best interest
• Proper documentation and client acknowledgment

Penalties for Twisting:

• License suspension or revocation
• Civil fines up to $10,000 per violation
• Restitution to harmed clients
• Criminal prosecution in severe cases

Misrepresentation

Prohibited Misrepresentations:

1. Policy Terms Misrepresentation

   • Falsely describing policy coverages or benefits
   • Overstating coverage limits or terms
   • Minimizing or hiding exclusions or limitations

2. Financial Condition Misrepresentation

   • Misrepresenting insurer's financial stability
   • False statements about insurer solvency or ratings
   • Misleading comparisons of insurer financial strength

3. Dividends or Returns Misrepresentation

   • Guaranteeing dividends or returns
   • Misrepresenting past dividend performance
   • Implying future dividends are certain

4. Policy Comparisons Misrepresentation

   • Unfair or misleading comparisons with other policies
   • Omitting material differences between policies
   • Misrepresenting competitor policy terms

Unfair Discrimination

Prohibited Discriminatory Practices:

Delaware law prohibits unfair discrimination in insurance:

Illegal Discrimination Based On:

• Race or ethnicity
• Religion or creed
• National origin
• Gender (except where actuarially justified)
• Age (except where actuarially justified)
• Marital status (in most cases)
• Sexual orientation or gender identity

Permitted Risk-Based Underwriting:

• Using actuarially sound factors (driving record, claims history, credit score)
• Applying filed and approved rating factors consistently
• Legitimate underwriting based on risk characteristics

Penalties for Discrimination:

• License suspension or revocation
• Civil penalties and fines
• Lawsuit by affected individuals
• Federal civil rights violations (in some cases)

Disclosure Requirements

Material Fact Disclosure

Producers must disclose all material facts to clients:

Material Facts Include:

• Policy coverage limits and deductibles
• Exclusions and limitations
• Waiting periods or conditions
• Cancellation and renewal provisions
• Premium payment terms
• Claims procedures

Timing of Disclosure:

• Before policy application (during initial discussion)
• During application process (review with client)
• At policy delivery (review declarations and terms)
• When changes occur (endorsements, renewals)

Producer Compensation Disclosure

Delaware requires disclosure of producer compensation in certain situations:

When Required:

• If client asks about compensation
• If conflict of interest exists
• For certain commercial insurance placements
• If different compensation for different carrier options

What to Disclose:

• Commission structure (percentage or flat fee)
• Contingent commissions or bonuses
• Ownership interests in insurance companies
• Referral fees or other compensation

Replacement Disclosure

When replacing an existing policy, producers must:

Provide Replacement Notice:

1. Inform client that proposed policy replaces existing policy
2. Provide comparison of existing and proposed policies
3. Disclose potential disadvantages of replacement
4. Obtain client signature on replacement acknowledgment form
5. Submit replacement documentation to Delaware DOI

Replacement Considerations:

• Surrender charges or penalties on existing policy
• Loss of benefits (accumulated dividends, incontestability period)
• New waiting periods or contestability period
• Premium cost comparison over time
• Underwriting requirements for new policy

Reporting Requirements

Duty to Report to Delaware DOI

Producers must report to Delaware DOI within 30 days:

Required Reports:

1. Criminal Convictions

   • Any criminal conviction (felony or misdemeanor)
   • Includes guilty pleas and nolo contendere
   • DUIs and traffic violations may be reportable

2. Administrative Actions

   • License suspension, revocation, or restriction in any state
   • Regulatory actions by insurance departments
   • FINRA, SEC, or other regulatory actions (if applicable)

3. Civil Judgments

   • Civil judgments related to insurance activities
   • Fraud or dishonest conduct judgments
   • Significant financial judgments

4. Personal Information Changes

   • Legal name change
   • Address change (business or residence)
   • Bankruptcy or insolvency

Consequences of Failure to Report:

• Additional disciplinary action for non-disclosure
• License suspension or revocation
• Inference of dishonesty or untrustworthiness

Duty to Report to Insurers

Producers must also report to appointing insurers:

• Changes in license status
• Regulatory actions or investigations
• Criminal charges or convictions
• Civil lawsuits related to insurance activities

Supervision and Compliance

Agency Supervision

Insurance agencies must supervise appointed producers:

Supervisory Responsibilities:

• Train producers on compliance and ethical conduct
• Monitor producer activities and transactions
• Review applications and policy placements
• Investigate consumer complaints
• Maintain compliance procedures and documentation

Agency Liability:

• Agencies may be liable for producer misconduct
• Vicarious liability for employee/agent actions
• Duty to terminate producers who violate law
• Requirement to report producer violations to DOI

Errors and Omissions Insurance

While not legally required, E&O insurance is highly recommended:

E&O Coverage:

• Protects against claims of professional negligence
• Covers defense costs and settlements
• Typical limits: $1 million per occurrence, $2 million aggregate
• Required by many appointing companies

Common E&O Claims:

• Failure to procure requested coverage
• Failure to notify client of non-renewal
• Errors in policy application or information
• Failure to explain policy limitations or exclusions

Penalties for Violations

Administrative Penalties

Delaware DOI may impose:

Criminal Penalties

Certain violations constitute crimes:

Insurance Fraud:

• Making false statements on applications
• Submitting fraudulent claims
• Misappropriating client funds
• Operating without a license

Penalties:

• Fines up to $50,000 or more
• Imprisonment up to 5 years or more
• Restitution to victims
• Permanent license revocation

Civil Liability

Producers may face civil lawsuits from:

Clients:

• Breach of fiduciary duty
• Professional negligence (E&O claims)
• Fraud or misrepresentation
• Breach of contract

Damages:

• Compensatory damages (actual losses)
• Consequential damages (foreseeable harm)
• Punitive damages (for willful or reckless conduct)
• Attorney's fees and costs