3.1 Federal Regulation: 18 U.S.C. §§ 1033–1034, Gramm-Leach-Bliley Privacy & the Terrorism Risk Insurance Act

Core Principle: Although the McCarran-Ferguson Act of 1945 established that insurance is primarily regulated by the individual states, Congress enacted 18 U.S.C. §§ 1033 and 1034 as part of the Violent Crime Control and Law Enforcement Act of 1994 to create federal criminal and civil jurisdiction over crimes of dishonesty, embezzlement, obstruction, and fraud that threaten the solvency of insurance enterprises operating in interstate commerce.

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Interstate Commerce Nexus & Statutory Scope

Federal jurisdiction under Title 18 of the United States Code is predicated on the Interstate Commerce Clause of the U.S. Constitution. 18 U.S.C. § 1033 applies directly to any person who is engaged in the "business of insurance" whose activities affect interstate commerce.

Broad Definition of the "Business of Insurance"

Under 18 U.S.C. § 1033(f)(1), the "business of insurance" means:

• the writing of insurance; or
• the reinsuring of risks by an insurer,

including all acts necessary or incidental to that writing or reinsuring, and the activities of officers, directors, agents or employees of insurers and other persons authorized to act on their behalf.

Because adjusting claims is incidental to writing insurance, staff and independent adjusters working for insurers are generally treated as participating in the business of insurance, and Louisiana applies the federal consent requirement when licensing adjusters.

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Prohibited Criminal Acts Under 18 U.S.C. § 1033

Section 1033 delineates four distinct categories of criminal conduct, each establishing severe federal penalties:

1. False Statements to Insurance Regulators [§ 1033(a)]

Prohibits any person from knowingly making any false material statement or report, or willfully overvaluing any land, property, or security, in connection with any financial report, filing, or examination presented to an insurance regulatory official or agency (such as the Louisiana Department of Insurance or NAIC examiners):

• Standard Penalty: Criminal fine and imprisonment for up to 10 years.
• Enhanced Penalty: If the conduct jeopardized the insurer's safety and soundness and was a significant cause of its conservation, rehabilitation or liquidation, the maximum prison sentence increases to 15 years.

2. Embezzlement and Misappropriation of Insurance Funds [§ 1033(b)]

Prohibits any officer, director, agent, adjuster, or employee of an insurance business from embezzling, abstracting, purloining, or willfully misappropriating any moneys, funds, premiums, credits, or claim drafts belonging to an insurer, policyholder, or claimant:

• Standard Penalty: Criminal fine and imprisonment for up to 10 years (or up to 15 years under the same safety-and-soundness enhancement).
• Lower Penalty for Small Amounts: If the total amount embezzled, purloined, or misapplied does not exceed $5,000, the maximum term of imprisonment is reduced to not more than 1 year.

3. False Entries in Books, Reports and Statements [§ 1033(c)]

Prohibits a person engaged in the business of insurance, including an officer, director, agent or employee, from knowingly making any false entry of material fact in any book, report or statement of the business with intent to deceive any person, including regulators and examiners, about the business's financial condition or solvency:

• Standard Penalty: Criminal fine and imprisonment for up to 10 years.
• Enhanced Penalty: Up to 15 years if the conduct jeopardized the insurer's safety and soundness and was a significant cause of its conservation, rehabilitation or liquidation.

4. Obstruction of Insurance Proceedings by Threats or Force [§ 1033(d)]

Prohibits anyone from corruptly influencing, obstructing or impeding, or trying to do so, by threats or force or by any threatening letter or communication, the due and proper administration of the law under which a proceeding involving the business of insurance is pending before an insurance regulatory official or agency or its appointed examiner:

• Penalty: Criminal fine and imprisonment for up to 10 years.

The "Prohibited Persons" Rule [18 U.S.C. § 1033(e)]

A frequently tested provision of § 1033 is the Prohibited Persons Rule in subsection (e). Unless the person obtains written consent, the prohibition has no time limit:

18 U.S.C. § 1033(e)(1)(A): Any individual who has been convicted of ANY criminal felony involving dishonesty or a breach of trust, or who has been convicted of an offense under § 1033, who willfully engages or participates in the business of insurance whose activities affect interstate commerce, is guilty of a federal felony punishable by a fine and imprisonment for up to 5 years.

Scope of Qualifying Felonies

The statutory disqualification is exceptionally broad. It is not limited to insurance-specific crimes. Any felony conviction in any state or federal court involving:

• Grand larceny, theft, or burglary;
• Embezzlement, extortion, or bribery;
• Fraud, forgery, counterfeiting, or falsifying records;
• Perjury, tax evasion, or securities violations;
• Mail fraud, wire fraud, or bank fraud.

Dual Liability for Employers [§ 1033(e)(1)(B)]

Federal law does not merely punish the convicted felon. Under 18 U.S.C. § 1033(e)(1)(B), it is a separate federal crime for an individual engaged in the business of insurance, such as an insurer or adjusting firm manager, to willfully permit a prohibited person to engage or participate in the business of insurance:

• An individual who willfully permits a prohibited person's participation faces a fine and up to 5 years imprisonment.
• Insurers and adjusting firms therefore screen applicants for criminal history, and Louisiana license applicants are fingerprinted for a criminal background check.

The 1033 Written Consent Process

Congress provided one route for a prohibited person to work lawfully in the business of insurance: written consent from an insurance regulatory official.

The Consent Mechanism under § 1033(e)(2)

• A person described in § 1033(e)(1)(A) may engage or participate in the business of insurance if the person has the written consent of any insurance regulatory official authorized to regulate the insurer, and the consent specifically refers to § 1033(e).
• In Louisiana, the Department of Insurance decides whether consent is needed, and whether to grant it, while it reviews the license application. Resident applicants who disclose criminal history complete the Department's criminal history disclosure form.
• LDI Regulation 119 addresses the Department's issuance of consent or waivers for persons affected by these prohibitions, and Louisiana licensing law separately allows the commissioner to deny or discipline licensees for felony convictions.
• Under R.S. 37:33, an individual may request a pre-application eligibility determination before applying or testing.

What Regulators Consider

Regulators evaluating a consent request typically look at the nature and seriousness of the offense, how long ago it occurred, whether it involved insurance funds or consumers, whether the sentence, probation and restitution are complete, evidence of rehabilitation, and the duties of the proposed position. Consent may carry conditions, such as limits on handling funds.

Exam Point: Completing a sentence, paying restitution or the passage of time does not by itself remove the need for written consent. A prohibited person must have the regulator's written consent before engaging in the business of insurance.

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18 U.S.C. § 1034 Civil Penalties & Enforcement

In addition to the criminal sanctions codified in § 1033, Congress enacted 18 U.S.C. § 1034 to grant the federal government potent civil enforcement weapons.

Civil Monetary Fines

Under 18 U.S.C. § 1034, the Attorney General of the United States may bring a civil action in any appropriate United States District Court against any person who engages in conduct constituting an offense under § 1033:

• The court may impose a civil penalty of not more than $50,000 for each violation, OR
• The amount of compensation which the person received or offered for the prohibited conduct, whichever amount is greater.

Injunctions under § 1034(b)

If a person is engaged in conduct constituting an offense under § 1033, the Attorney General may petition an appropriate U.S. district court for an order prohibiting the person from engaging in that conduct. The court may issue the order if it finds the conduct constitutes such an offense, and filing the petition does not preclude other remedies available to the United States or any other person.

Other Federal Regulation on the Series 204 Outline

Privacy: Gramm-Leach-Bliley Act (GLBA)

• Enacted in 1999, GLBA requires financial institutions, including insurers, to protect customers' nonpublic personal information.
• Insurers must give customers privacy notices describing their information-sharing practices and let consumers opt out of having nonpublic personal information shared with nonaffiliated third parties, subject to exceptions.
• Exceptions include sharing needed to process or service a transaction, such as adjusting a claim, and sharing required by law or to prevent fraud.
• For insurers, state insurance regulators enforce GLBA's privacy provisions through state laws and regulations.

Terrorism Risk Insurance Act (TRIA)

• Enacted in 2002 after the September 11 attacks and extended through December 31, 2027, TRIA provides a federal backstop for commercial property and casualty losses from certified acts of terrorism.
• Covered insurers must make terrorism coverage available to commercial policyholders on terms that do not differ materially from other coverage; the policyholder may decline it.
• The Secretary of the Treasury, in consultation with the Secretary of Homeland Security and the Attorney General, certifies an act of terrorism, and insured losses from the act must exceed $5 million for certification.
• Federal payments begin only after industry-wide insured losses from certified acts exceed the $200 million program trigger. Each insurer first pays a deductible equal to 20% of its prior year's direct earned premium, after which the federal government pays 80% of the insurer's losses, subject to an annual program cap of $100 billion.

Other Federal Topics

• National Flood Insurance Program: see the NFIP section in this chapter.
• Motor Carrier Act (MCS-90): see the commercial auto section.

Practical Application & Exam Scenarios

Scenario 1: The Staff Adjuster with a Prior Embezzlement Conviction

Eight years ago, an individual was convicted of felony grand theft in Texas for embezzling $12,000 from an auto dealership. After completing probation and paying full restitution, the individual moves to Louisiana, passes the PSI adjuster exam, and is hired by an independent adjusting firm to handle property claims. The firm did not run FBI fingerprints or request a 1033 waiver, believing that out-of-state non-insurance felonies were exempt.

• Analysis: The adjuster is exposed to federal prosecution under 18 U.S.C. § 1033(e). Felony grand theft is a crime involving dishonesty and breach of trust. Under § 1033(e)(1)(A), the adjuster is subject to up to 5 years federal imprisonment for adjusting claims without written regulatory consent. Under § 1033(e)(1)(B), individuals at the firm who willfully permit the adjuster to keep participating after learning of the conviction also face prosecution, so the firm must act as soon as it knows.

Scenario 2: False Financial Filings During Insolvency

During a financial solvency examination conducted by the Louisiana Department of Insurance, the Chief Financial Officer (CFO) of a regional property insurer intentionally understates the company's loss reserves by $20 million on official LDI filings to conceal an impending capital deficit. Six months later, the insurer collapses into liquidation, leaving thousands of unpaid hurricane claims.

• Analysis: Under 18 U.S.C. § 1033(a), knowingly submitting false material financial reports to state insurance regulators is a federal felony carrying up to 10 years imprisonment. Because the misrepresentation jeopardized the insurer's safety and soundness and was a significant cause of its liquidation, the enhanced sentencing provision applies, raising the maximum penalty to 15 years imprisonment.

Scenario 3: Adjuster Embezzlement of Claim Proceeds

An independent claims adjuster working a catastrophic hail storm in Shreveport creates fraudulent supplemental repair estimates on ten closed files, forging contractor signatures and directing $35,000 in insurer supplemental settlement checks into a personal shell company account.

• Analysis: The adjuster has violated 18 U.S.C. § 1033(b) by intentionally purloining and misapplying insurance funds and claim proceeds affecting interstate commerce. Because the amount exceeds $5,000, the adjuster faces federal felony charges carrying up to 10 years in federal prison, criminal fines, and civil penalties of up to $50,000 per violation under 18 U.S.C. § 1034.