12.3 Adjuster Code of Ethics, Fiduciary Duty, Regulation 169 Privacy & 18 U.S.C. §§ 1033/1034

Adjuster Code of Ethics, Fiduciary Duty, Regulation 169 Privacy & 18 U.S.C. §§ 1033/1034

Exam Focus: Professional ethics, privacy compliance, and federal statutory mandates represent critical tested competencies on the New York Series 17-70 exam. Key focus areas include: recognizing conflicts of interest and illegal kickbacks, understanding the fiduciary duty owed to the insurer while maintaining fair dealing with claimants, safeguarding Non-Public Personal Information (NPI) under New York Regulation 169 (11 NYCRR 420), and navigating the strict federal prohibitions of 18 U.S.C. §§ 1033 and 1034—particularly the permanent disqualification of felons convicted of crimes involving dishonesty unless granted a formal written "1033 Consent Waiver" by the Superintendent.

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The Adjuster's Ethical Code & Fiduciary Responsibilities

Insurance adjusters hold a distinct position of trust in the financial services ecosystem. They evaluate coverage, assess physical damage, interpret complex legal contracts, and authorize the disbursement of substantial insurance funds. With this authority comes strict fiduciary obligations and high ethical standards.

The Adjuster as a Fiduciary

In legal terms, an independent or staff adjuster acts as an agent of the insurer (the principal). As an agent, the adjuster owes a strict fiduciary duty to the insurance company:

• Duty of Loyalty: Placing the principal's lawful interests above personal financial gain;
• Duty of Obedience: Adhering strictly to policy provisions, corporate claim guidelines, and statutory settlement regulations;
• Duty of Full Disclosure: Promptly and accurately disclosing all material facts uncovered during the investigation, including coverage ambiguities, subrogation recovery possibilities, and fraud indicators;
• Duty of Accounting: Faithfully accounting for all claim funds, salvage recoveries, deductible collections, and expense disbursements.

The Affirmative Duty of Fair Dealing with Claimants

While the adjuster's fiduciary loyalty lies with the insurer, this loyalty is not a license to mistreat or exploit policyholders or third-party claimants. Adjusters owe an affirmative common law and statutory duty of fair dealing, honesty, and transparency toward all claimants:

• No Misrepresentation: Adjusters must not conceal policy coverages, misquote policy terms, or misrepresent facts to artificially suppress claim payouts.
• Prompt, Impartial Evaluation: Every claim must be evaluated objectively based on verifiable physical facts, supported contractor estimates, and policy language—never on subjective bias, prejudice, or personal animosity.
• Fair Settlement Conduct: Adjusters must not coerce or pressure policyholders into unfair settlements or delay claims to force financially distressed claimants to accept reduced cash payouts (practices strictly prohibited under New York Regulation 64 / 11 NYCRR 216).

Conflicts of Interest and Prohibited Practices

Professional codes of ethics (including those established by the National Association of Independent Insurance Adjusters - NAIIA) and New York Insurance Law prohibit practices that compromise adjuster impartiality:

1. Undisclosed Personal or Financial Interest: An adjuster cannot investigate, adjust, or settle any claim involving property they own, lease, or have a financial interest in, nor can they adjust claims submitted by immediate family members or business associates without full, written disclosure and carrier consent.
2. Strict Prohibition Against Kickbacks and Gratuities: An adjuster must NEVER accept any referral fee, secret commission, gift, travel perk, or financial kickback from auto body repair shops, restoration contractors, independent medical examiners, attorneys, or salvage buyers. Accepting remuneration from a repair vendor constitutes commercial bribery, a breach of fiduciary duty, and grounds for immediate license revocation under NY Insurance Law § 2110.
3. Anti-Steering Prohibitions (NY Insurance Law § 2610): Under New York law, an adjuster or insurer cannot require or coerce a claimant into having repairs performed at a specific automobile repair shop or contractor. The claimant retains the absolute right to select their own repair facility. While an adjuster may recommend a qualified facility upon request or participate in an approved Direct Repair Program (DRP), they cannot condition claim payment on using a preferred vendor.
4. Acquisition of Salvage Property: An adjuster is strictly forbidden from acquiring or purchasing damaged salvage property from a claim they handled, either directly or through an intermediary, for personal profit.

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Consumer Privacy Regulations: NY Regulation 169 & GLBA

During claims investigations, adjusters routinely collect highly sensitive personal data, including medical treatment histories, diagnostic scans, wage statements, tax records, and banking information. The collection, storage, and transmission of this data are governed by federal and state privacy statutes.

The Federal Framework: Gramm-Leach-Bliley Act (GLBA)

Passed by Congress in 1999, the Gramm-Leach-Bliley Act (Financial Services Modernization Act) mandates that financial institutions—expressly including insurance carriers, agencies, and adjusters—establish robust safeguards to protect consumer financial privacy.

New York Regulation 169 (11 NYCRR 420)

New York implemented GLBA requirements through Regulation 169, titled Privacy of Consumer Financial and Health Information. Regulation 169 establishes comprehensive rules governing the treatment of Non-Public Personal Information (NPI):

• Non-Public Personal Information (NPI): Personally identifiable financial information provided by a consumer to an insurer or adjuster, resulting from a transaction, or obtained in connection with administering an insurance product or settling a claim. Examples include:
  • Social Security numbers, driver's license numbers, and dates of birth;
  • Bank account numbers, routing numbers, and credit card account records;
  • Credit reports, wage stubs, tax returns, and asset balances.
• Protected Health Information (Health NPI / PHI): Medical histories, diagnosis codes, physician progress notes, surgical records, pharmacy receipts, and Independent Medical Examination (IME) reports gathered during bodily injury, PIP, or liability investigations.

Adjuster Safeguarding Requirements

Under Regulation 169, adjusters and adjusting firms must implement administrative, technical, and physical safeguards:

• Administrative Safeguards: Limiting file access strictly to authorized personnel who require the data to process the claim; conducting privacy compliance training.
• Technical Safeguards: Encrypting all electronic claim files, transmission emails, and portable laptops; utilizing multi-factor authentication (MFA); prohibiting the transmission of unencrypted SSNs or medical records over open networks.
• Physical Safeguards: Maintaining a strict "clean desk" policy; keeping physical claim files locked in secure file cabinets; shredding paper documents containing NPI using cross-cut shredders.

Re-Disclosure Restrictions and Exceptions

Adjusters cannot disclose consumer NPI to third parties without prior authorization. However, Regulation 169 provides specific statutory exceptions necessary for claims administration:

• Disclosures required to administer, process, or settle an active insurance claim;
• Disclosures to fraud investigators, the insurer's SIU, the DFS Insurance Frauds Bureau, and law enforcement;
• Disclosures made pursuant to a judicial subpoena, court order, or regulatory examination.

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Federal Insurance Fraud Statute: 18 U.S.C. §§ 1033 and 1034

In 1994, Congress enacted the Violent Crime Control and Law Enforcement Act, codifying federal criminal statutes specifically targeting insurance crimes affecting interstate commerce under 18 U.S.C. §§ 1033 and 1034. These federal laws ensure that insurance professionals who commit financial crimes or corrupt the insurance mechanism face severe federal felony prosecution.

Substantive Offenses Under 18 U.S.C. § 1033

Section 1033 establishes four distinct federal criminal offenses for acts committed by individuals engaged in the business of insurance:

1. Section 1033(a) - False Financial Statements:
   • Knowingly making false material statements, reports, or representations in financial documents submitted to regulatory examiners or insurance commissioners to deceive them regarding the insurer's financial condition.
   • Penalty: Fine and imprisonment up to 10 years; if the false statement contributed to the insurer being placed in conservation, rehabilitation, or liquidation, the penalty increases to 15 years.
2. Section 1033(b) - Embezzlement and Misappropriation of Funds:
   • Embezzling, abstracting, purloining, or willfully misapplying insurance premiums, claims moneys, funds, or assets of an insurance business.
   • Penalty: Imprisonment up to 10 years (or 15 years if the offense jeopardized the solvency of the insurer). If the amount embezzled does not exceed $5,000, the offense is a misdemeanor punishable by up to 1 year.
3. Section 1033(c) - False Book Entries:
   • Knowingly making false entries in any book, report, or statement of an insurance entity with the intent to deceive any person, including an insurance regulator, auditor, or examiner.
   • Penalty: Fine and imprisonment up to 10 years.
4. Section 1033(d) - Obstructing Regulatory Proceedings:
   • Corruptly influencing, obstructing, or impeding the proper administration of the law under which any proceeding is being conducted by an insurance regulatory official or examiner.
   • Penalty: Fine and imprisonment up to 10 years.

18 U.S.C. § 1033(e) - The Prohibited Persons Rule & The 1033 Consent Waiver

Section 1033(e) is one of the most frequently tested federal provisions on the Series 17-70 exam, establishing strict rules regarding criminal records in the insurance industry:

1. The Statutory Prohibition (§ 1033(e)(1)(A)):
   • Any individual who has been convicted of ANY criminal felony involving dishonesty or a breach of trust (such as fraud, embezzlement, grand larceny, perjury, or forgery), or who has violated § 1033, is permanently prohibited from engaging or participating in the business of insurance in any capacity.
   • This federal prohibition applies across all 50 states and covers all roles—including licensed independent adjusters, staff adjusters, claims appraisers, executives, and agency clerical staff.
2. The 1033 Written Consent Waiver (§ 1033(e)(1)(B)):
   • A prohibited person may only engage in the business of insurance if they obtain the specific, written consent of an insurance regulatory official.
   • In New York, the prohibited person must file a formal application for a 1033 Consent Waiver with the Superintendent of Financial Services. The Superintendent exercises discretion to grant or deny the waiver based on the applicant's rehabilitation, the severity of the prior felony, and the passage of time.
   • Without this specific written consent in hand, acting as an adjuster or working in insurance is a federal felony punishable by up to 5 years imprisonment.
3. Employer Liability (§ 1033(e)(2)):
   • It is a federal criminal violation for any insurer, adjusting firm, agency, or third-party administrator to willfully permit a prohibited person to participate in the business of insurance without an approved 1033 waiver.
   • Sponsoring entities that fail to conduct due diligence face federal fines and corporate penalties. This requirement explains why New York mandates electronic fingerprinting (DCJS and FBI background checks) through IdentoGO for all independent adjuster applicants under NY Insurance Law § 2108.

18 U.S.C. § 1034: Civil Penalties

Under Section 1034, the United States Attorney General may commence civil actions against any person who violates § 1033:

• Courts may impose a civil penalty of up to $50,000 per violation or the amount of compensation which the person received or was offered for the prohibited conduct, whichever is greater.
• The Attorney General may also obtain federal injunctions prohibiting individuals from engaging in the insurance business.