Fair Credit Reporting Act and federal insurance fraud crimes, including the 18 U.S.C. 1033 consent

Two federal laws every producer must know

Insurance is regulated mainly by the states, but two federal laws reach directly into a producer's daily work. The Fair Credit Reporting Act (FCRA) controls how insurers obtain and use reports about consumers. 18 U.S.C. 1033 makes certain insurance-related conduct a federal crime and bars people with certain criminal records from the business unless a regulator gives written consent.

The Fair Credit Reporting Act

Congress found that consumer reporting agencies play a vital role in assembling and evaluating information on consumers, and must exercise that responsibility with fairness, impartiality and respect for the consumer's right to privacy. The Act requires those agencies to use reasonable procedures to meet the needs of commerce for credit, personnel, insurance and other information, with regard to confidentiality, accuracy, relevancy and proper use.

Insurers use two kinds of report:

• A consumer report covers credit history and similar data. Underwriting insurance is a permissible purpose for obtaining one.
• An investigative consumer report goes further, covering a person's character, general reputation, personal characteristics and mode of living, often gathered through interviews with neighbors, friends or associates.

Rules for investigative consumer reports

• Disclosure within 3 days. Anyone who orders an investigative consumer report must clearly tell the consumer in writing, mailed or delivered no later than three days after the report was first requested. The notice must tell the consumer of the right to request more information, and include the written summary of consumer rights.
• Nature and scope within 5 days. If the consumer makes a written request, the requester must disclose the complete nature and scope of the investigation in writing within five days after the request was received or the report was first requested, whichever is later.
• Certification. The agency may not prepare the report until the requester certifies that it made the disclosure and will honour the nature-and-scope request.
• Accuracy safeguards. Public-record information about arrests, convictions, judgments or tax liens must be verified within 30 days before the report is furnished. Adverse information from a personal interview must be confirmed by an independent source, unless the person interviewed is the best possible source.
• A requester that kept reasonable procedures to comply is not liable for a violation of the disclosure rules.

Adverse action

If an insurer declines coverage, or charges a higher rate, because of information in a consumer report, it must give the consumer an adverse action notice. The notice names the reporting agency, states that the agency did not make the decision, and tells the consumer of the right to a free copy of the report within 60 days and the right to dispute inaccurate information. The Medical Information Bureau (MIB), which life and health insurers use, is a consumer reporting agency subject to these rules.

18 U.S.C. 1033: federal insurance crimes

Section 1033 applies to anyone engaged in the business of insurance whose activities affect interstate commerce. The business of insurance means writing insurance or reinsuring risks, including the activities of officers, directors, agents and employees.

The crimes are:

• False statements to regulators: knowingly making a false material statement, or materially overvaluing property, in financial reports given to an insurance regulator to influence its actions.
• Embezzlement: willfully embezzling or misappropriating an insurer's money, premiums or other property.
• False entries: knowingly making false entries in books or reports to deceive anyone about an insurer's financial condition or solvency.
• Obstruction: using threats or force to obstruct a proceeding before an insurance regulator.

Each carries up to 10 years in prison. False statements, embezzlement and false entries rise to 15 years if the act jeopardized an insurer's safety and soundness and was a significant cause of its conservation, rehabilitation or liquidation. Embezzlement of $5,000 or less carries up to one year.

The prohibited person and the 1033 consent

A person convicted of any felony involving dishonesty or a breach of trust, or of any offense under section 1033, commits a crime punishable by up to 5 years if he or she willfully engages or participates in the business of insurance. Anyone in the business who willfully permits that person to participate faces the same 5 years.

The only way back in is the written consent of an insurance regulatory official authorized to regulate the insurer, and the consent must specifically refer to subsection (e). This is commonly called a 1033 waiver or 1033 consent. A producer applicant with such a conviction must apply for it before working in the business; a license alone does not cure the bar.

Remember: the person needing consent and the employer or agency that lets them work without it are both committing a federal crime.