Posting for

Friday, September 25, 1998

by: Bert Rush

brush@firstam.com

FELONS/EMPLOYEES/INSURANCE REGULATORS

One of the messages I inadvertantly deleted the other day was from Frank Melchior (Iselin, NJ) about a new (to me) federal law.

Seems Frank attended some title meeting where several representatives from the Attorney General or U.S. Attorney's office cautioned the group about violating 18 U.S.C. sections 1033 and 1034. These sections, enacted in 1994, make it a federal crime to employ a former felon in the insurance business without permission from your state insurance regulators. No kidding.

These sections do other things too--so let's look at them in detail.

Section 1033(a) makes it unlawful for anyone "engaged in the business of insurance whose activities affect interstate commerce" to make a false statement or report, or materially overvalue any land, property or security, in connection with any financial reports or documents presented to insurance regulators. This crime is punishable by a fine of not more than $50,000 for each violation--or the amount a person receives or offers in connection with a violation--whichever is greater; or imprisonment for up to 10 years--unless the violation was serious enough to cause an insurer to fail, in which case the sentence can be 15 years--or both a fine and imprisonment.

The "business of insurance" is defined broadly enough to include agents and reinsurers (18 U.S.C. section 1033(f) (1) and (2), and "activities" will probably be deemed to "affect interstate commerce" if they involve national lenders, out-of-state customers and/or out-of-state title underwriters. So this probably applies to virtually everyone in the title and escrow/closing business--even those not required to be licensed by a state department of insurance.

Section 1033(b) makes it unlawful for "an officer, director, agent, or employee" of "any person engaged in the business of insurance whose activities affect interstate commerce" to embezzle or misappropriate "moneys, funds, premiums, credits, or other property" of the "person engaged in the business of insurance." This crime is punishable same as sec. 1033(a), above, except if the amount taken does not exceed $5,000 the imprisonment may not be more than one year.

Section 1033(c) makes it unlawful for a person "engaged in the business of insurance and whose activities affect interstate commerce or is involved (other than as an insured) in a transaction relating to the conduct of the affairs of such a business" to make a false entry "of a material fact in any book, report or statement of such person engaged in the business of insurance with the intent to deceive" anyone "about the financial condition or solvency of such business." This crime is punishable same as sec. 1033(a), above.

Section 1033(d) makes it unlawful to `corruptly influence, obstruct or impede' by threats or force any "proper administration of the law" by insurance regulators. This crime is punishable same as section 1033(a), above, except the maximum imprisonment is 10 years.

Section 1033(e)(1)(A) makes it unlawful for any person who "has been convicted of any criminal felony involving dishonesty or a breach of trust, or who has been convicted of an offense under this section (1033)" to engage or participate "in the business of insurance whose activities affect interstate commerce." This crime is punishable same as sec. 1033(a), above, except the maximum imprisonment is 5 years.

Now the payoff: Section 1033(e)(1)(B) makes it unlawful for "any individual who is engaged in the business of insurance whose activities affect interstate commerce" to willfully permit a former felon (as described above) to participate in the business of insurance. This crime is punishable same as sec. 1033(a), above, except the maximum imprisonment is 5 years.

But note: Section 1033(e)(2) provides that a former felon may engage or participate in the business of insurance if he or she has "the written consent of any insurance regulatory official authorized to regulate the insurer, which consent specifically refers to this subsection."

Comment: One ambiguity in all this, seems to me, is that the definition of those involved in the "business of insurance" seems broad enough to include persons not required to be licensed by insurance regulators--at least in some states--yet the only way a former felon can be cleared to work is by permission from the regulatory official authorized to "regulate the insurer." I guess agents would be expected to go to their own regulator or, if they are not required to be licensed, to their underwriter's regulator.

In addition to the fines described above, section 1034 provides that the Attorney General or U.S. Attorney may petition a U.S. District Court to enjoin a former felon from working in the insurance business.

Questions, comment, argument? Just press the "reply" button and send your thoughts to LandSakes.

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Following last Friday's posting, Frank Melchior (Iselin, NJ) writes:

Bert: Sorry you lost the e-mail. The information came to me at a meeting of the liaison committee between the Commissioner of Insurance and the title industry. They reported that they learned of this from a (deputy?) US Attorney at a NAIC meeting.

Their view is that every employee (even janitorial) must either be a non-felon, or have a waiver. Considering the potential penalties for the employer, I would think that discretion in this case is definitely the better part of valor.

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Following up on our posting for Friday, 9/25, Lillian Eyrich (New Orleans) writes:

This may be a stupid question, but I will ask it anyway: Does this new law mean we cannot employ ANYONE who has a felony conviction? First American owns the building in which our state and regional offices are located, and we have employees whose daily job duties have nothing to do with selling title insurance.

We have people who microfilm policies and enter the data in the prior policy database system, people who do building and company car maintenance, people who act as couriers to deliver packages in the metro area, and other similar jobs.

I don't know about current staff, but I do know we have at times employed persons with felony convictions who have served their time and who were either on parole or were even through with their parole status. Can anyone tell us if this new law means we cannot employ former felons in these and similar capacities? Any help would be appreciated.

Reply to Lillian: As I read the statute it governs the employment of a former felon in any capacity by a "person" in the insurance business--so I'd say the answer to your question is "Yes, you cannot." And I agree with you that the law is overbroad.

You may want to inquire of your state insurance regulators as to what their policies are--to be safe you may want to get written waivers for each former felon from your state insurance regulator.

And it's not a stupid question.