When they are charged, our experience is that an example is sought to be made of them. A recent case involving “advance commission fraud” illustrates how long sentences and large fines can be imposed against those who work in the insurance industry.
On December 1, 2015, an insurance agent Eric Lee was sentenced under a plea agreement to 10 years in state prison for defrauding over $1.4 million through an advance commission scheme. In state court, this means that with good time, Mr. Lee should only serve five years.
Mr. Lee pleaded guilty to 10 felony counts of grand theft
and 10 felony counts of insurance fraud with sentencing enhancements for damage
exceeding $100,000, aggravated white collar crime over $500,000 and property
damage over $1.3 million. Mr. Lee was also ordered to pay $1.4 million in
restitution and a $2.8 million fine.
These sentencing enhancements show how the amount of loss in a fraud case in California state court, like federal court, has a significant impact on the total sentence that can be imposed.
These sentencing enhancements show how the amount of loss in a fraud case in California state court, like federal court, has a significant impact on the total sentence that can be imposed.
Factual Background Mr.
Lee worked as an insurance agent for FMC Financial Group (FMC), a general
agency for the insurance company Mass Mutual from October 2009 to November
2010. Between
May 2010 and October 2010, Mr. Lee sold universal life insurance policies, in
excess of one year, to new clients and fraudulently completed their insurance
policy applications.
Mr. Lee illegally overstated the annual income, net worth, and the source of the applicants’ income on insurance applications in order for life insurance policies to be issued by Mass Mutual. The defendant advised policy holders that they would be receiving free insurance and wrote them a personal check to pay for their first month’s premiums on the policy.
Advance Commission Fraud Mr. Lee illegally engaged in a practice known in the insurance industry as an “advance commission fraud.” An advance commission fraud occurs when insurance carriers offer a commission in excess of an annual premium that is paid up front. Agents sell policies with the intent of allowing them to expire after one year while keeping the excess of the annual premium/commission as a profit. This profit to the agent is a loss to the insurance company.
Mr. Lee illegally overstated the annual income, net worth, and the source of the applicants’ income on insurance applications in order for life insurance policies to be issued by Mass Mutual. The defendant advised policy holders that they would be receiving free insurance and wrote them a personal check to pay for their first month’s premiums on the policy.
Advance Commission Fraud Mr. Lee illegally engaged in a practice known in the insurance industry as an “advance commission fraud.” An advance commission fraud occurs when insurance carriers offer a commission in excess of an annual premium that is paid up front. Agents sell policies with the intent of allowing them to expire after one year while keeping the excess of the annual premium/commission as a profit. This profit to the agent is a loss to the insurance company.
Insurance
agents make their money from first year commissions (FYC) on the sale of new
policies, renewal commissions, and service fees on policies which have been on
the books beyond the first year. If an agent works for an established agency,
they will get paid a percentage of the total FYC. The FYC is a calculation
based on the first year premium that is due to the insurance company. The total
FYC paid to an agent could be anywhere between 50 percent to 130 percent based
on the insurance companies the agency represents and what type of policy sold.
Once
the policy was placed, Mass Mutual would pay the advance commissions to the FMC
General Agent (GA) who had the discretion on how to distribute the commissions.
The commission amount Mass Mutual would advance was based on the policy being
in force for one calendar year. The GA would annualize the commissions to the
agent instead of paying commissions monthly as long as the policy was in force.
For each policy placed, the GA and manager each received a percentage.
Mr.
Lee received the remainder of the percentage from the commission. If a policy
lapsed before the first year was complete, the agent was required to pay back
the pro-rated portion (charge back) of the commission. Mass Mutual paid a one
year commission in advance once the policy holders’ insurance coverage was
approved and in place. Lee committed an advance commission scheme by collecting
more than $1.4 million on unearned commissions after the insurance policy would
lapse after one year due to no future payments being made on the premiums.
Carrier's Audit Resulted in Referral to Department of Insurance Mass
Mutual conducted an audit of the policies and discovered a large volume of lapsed
policies and contacted the California Department of Insurance, who investigated
this case.
Posted by Tracy Green, Esq.
Office: 213-233-2261
Posted by Tracy Green, Esq.
Office: 213-233-2261
