How Insurers Can Save Money and Maintain Compliance—Part 3: Background Checks

It is a best practice—and a good habit—to initially perform necessary due diligence by conducting a multi-component search, such as a federal and county criminal search, credit check, and RIRS actions.

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Part one of this three part series explained how the affiliation process saves the insurer money by appointing only the agency, when the state rules apply.  It also talked about how the company maintains compliance with all states when an agent or an agency, or both, must be appointed. Part two gave an insurance company insight into how to save on appointment fees by using the affiliated agent process and Just in Time appointments.  Here is another topic to consider when thinking about saving money to the bottom line.

While keeping ahead of the regulators may seem like the primary concern, insurers should also look internally, and take responsibility for ensuring that their agents are in good standing. One excellent—and ultimately money saving—way to do this is by conducting a background investigation prior to hiring or contracting with agents.

Background Investigations

Many states put the responsibility on the insurance company to interpret what background requirements they should conduct, if any, prior to submitting an appointment to the state and/or during the time producers are representing them. This is called “due diligence.” The question under consideration is whether or not the appointee is a suitable person, is trustworthy, and is qualified to act as an insurance producer. How the insurer determines the answer to this question is based on when, or if, a background investigation should be conducted—either pre-appointment, at appointment renewal time or at any regular interval, and on whom and looking at which components of the appointment.

This also brings up the topic of The Violent Crime Control and Law Enforcement Act, 18 USC Section 1034. Here is an excerpt from the NAIC’s Guidelines for State Insurance Regulators to the Violent Crime Control and Law Enforcement Act of 1994:

Section 1034 is captioned “Civil Penalties and Injunctions for Violations of Section 1033.” The section allows the U.S. Attorney General’s Office to bring civil actions against a person who engages in conduct constituting an offense under Section 1033. If found to have committed the offense, the person is subject to a civil penalty of not more than $50,000 for each violation or the amount of compensation the person received or offered for the prohibited conduct, whichever amount is greater. The section also permits the U.S. Attorney General’s Office to seek an order (an injunction) prohibiting persons from engaging in any illegal conduct.

No one may work in the insurance industry if s/he has been convicted of a felony involving breach of trust or dishonesty. This includes all employees, not just producers. If a producer is convicted after the initial contract, then an application for a 1033 Waiver must be submitted to the resident state. If approved, the producer may continue working; if not, then s/he may no longer work in the insurance industry. This is one of the main reasons every insurer and agency should, at a minimum, conduct a federal criminal search initially and periodically. As indicated in the excerpt above, the penalty could be up to $50,000 for each violation.

Below is another excerpt from the same source in reference to Section 1033.

The insurance fraud provisions of the Act are contained in two new sections to Title 18 of the United States Code. Section 1033 is captioned “Crimes by and Affecting Persons Engaged in the Business of Insurance Whose Activities Affect Interstate Commerce.” The section enumerates certain activities as crimes if they are carried out by individuals, their agents, and employees engaged in the business of insurance and whose activities affect interstate commerce.

All along we have been talking about how to save money on compliance mandates, while staying compliant.  This may be one way in which spending a little now could save you a great deal if the future. It is a best practice—and a good habit—to initially perform necessary due diligence by conducting a multi-component search, such as a federal and county criminal search, credit check, and RIRS actions. On an ongoing basis, to follow up, conduct a federal criminal search to comply with 18 USC Sections 1033 and 1034, at minimum.  These are federal laws, and the repercussions—financial and reputational—could be significant if your actions are seen as contrary to the law.

In sum, saving money is important to running a business, whether in insurance or in another industry. Because the insurance industry is one of the most highly regulated industries in this country, it all starts with compliance, state and federal. Doing what it takes to avoid market conduct fines and sanctions is not only good ethical practice, it will ultimately improve your bottom line.

How Insurers Can Save Money and Maintain Compliance—Part 1: Optimizing the Affiliated Agent Process

How Insurers Can Save Money and Maintain Compliance—Part 2: Appointment Reconciliation and JIT appointments

Karen Machamer // Karen Machamer, an industry veteran of 23 years,  is expert in the crucial details of regulatory compliance, and is a strong advocate for more consistency within the industry. At time of writing, Karen Machamer was Insurance Licensing and Compliance Manager at VUE Software, Inc. VUE Software specializes in innovating and automating business processes for the insurance industry across Carriers, MGAs, IMOs and Distributors. For further information, please email to

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