Persons Employed in the Business of Insurance
Convicted Persons; Waivers

Adopted New Rule: N.J.A.C. 11:17E-1

Proposed: June 18, 2001 at 33 N.J.R. 2021(a)

Adopted: October 11, 2001 by Donald Bryan, Acting Commissioner for Insurance, Department of Banking and Insurance

Filed: November 7, 2001 as R. 2001 d.459, with technical changes not requiring additional public notice and comments. (See N.J.A.C. 1:30-6.2)

Authority: N.J.S.A. 17:1-8.1, 17:1-15e, 17:22AA-1 et seq., 2A:168A-1 et seq., and 18 U.S.C. §1033 and 1034

Effective Date: December 3, 2001

Expiration Date: December 3, 2006

Summary of Public Comments and Agency Responses:

The Department received four written comments regarding this proposal from:

    1. Professional Insurance Agents of New Jersey;
    2. Insurance Council of New Jersey;
    3. New Jersey Manufacturers Insurance Group; and
    4. American Council of Life Insurers.

One comment was received after the close of the comment period, and was not considered.

1. COMMENT: One commenter expressed concern with the use of the words "directly or indirectly" in N.J.A.C. 11:17E-1.3(b) which states that no insurer, producer, limited insurance representative, or any other person or independent contractor operating a business directly or indirectly involved in the business of insurance shall employ prohibited persons without having first obtained a waiver.

The commenter claimed that the use of the words "operating a business directly or indirectly" extends the prohibition on the employment of prohibited persons beyond the scope of 18 U.S.C. § 1033(e)(2) (the "Act"). The commenter noted that the Act describes the prohibited conduct as being limited to the employment of prohibited persons in the business of insurance whose activities affect interstate commerce. The commenters urged the Department to remove the words "directly or indirectly" which will eliminate one source of confusion and will more closely track the Act.

RESPONSE: The Department’s use of the words "operating a business directly or indirectly" was intended as a means of indicating the far reaching scope of 18 U.S.C. 1033. The definition of "business of insurance" as used in the Act encompasses any company in the business of writing insurance or reinsuring risks and includes any officer, director, agent, or employee of said insurer, producer, limited insurance representative, or any other person authorized to act on behalf of such persons, including independent contractors of insurers.

The reference to "operating a business directly or indirectly" as used in the proposal was intended as a means of further defining the scope of the term "business of insurance." However, since the use of these words has created some confusion on the part of the commenter, the Department will, upon adoption, delete the words "operating a business directly or indirectly" from N.J.A.C. 11:17E-1.3(b). It should be noted that this change does not in any way diminish the scope of businesses that are subject to these rules. Furthermore, the definition is consistent with the same term that is used in the NAIC guidelines that were adopted in 1998.

2. COMMENT: Several commenters have asked the Department to insert the word "willfully" in N.J.A.C. 11:17E-1.3(b). They stated that the word "willfully" is used in the Act to describe the responsibility of an employer to not "willfully" permit a prohibited person to be employed in the business of insurance without a waiver. They claimed that the Department should add "willfully" to the rule to reflect the exact wording in the Act.

RESPONSE: The word "willfully" as used in 18 U.S.C. §1033(e)(1)(B) is a description of the elements of a Federal crime that may be committed by those employers that permit prohibited persons to be employed in the business of insurance without a waiver. As used in this rule, N.J.A.C. 11:17E-1.3(b) does not describe the elements of a crime but rather is stating the principle that no insurer, producer, limited insurance representative, or any other person or independent contractor operating a business involved in the business of insurance in New Jersey shall employ a prohibited person without first having ensured that said person has a waiver. As used in the Act, the word "willfully" has reference to the element of intent in judging if a federal crime has been committed. In these rules, the removal of the word "willfully" is consistent with the aim to control the employment of prohibited persons in the business of insurance. This subchapter is designed to implement the Act and to require employers to determine if current or future employees have prohibitive convictions. Clearly, the Act and the intent of these rules is to impose some burden of reasonable inquiry on employers to participate in a screening process. As a result of the foregoing, the Department disagrees with the opinions expressed by the commenters and will not implement the requested change.

3. COMMENT: One commenter claimed that the proposal fails to provide the insurance industry with clear and consistent standards by which employers can identify those employees who are prohibited persons. Furthermore, the commenter asserted that the Department exceeded its authority in imposing any obligation on employers regarding implementation of the Act and stated that insurers should not be under any obligation to determine if they are employing or are about to employ a prohibited persons. Also, the commenter asked the Department to grant a general omnibus waiver to all currently employed persons so that they can continue in employment without interruption.

RESPONSE: The commenter’s attention is directed to §1033 (e)(1)(B) which provides that it is a federal crime for any individual or company to willfully employ in the business of insurance any individual who is deemed to be a prohibited person. Clearly it is the Act that imposes criminal sanctions upon the individual and the company that employs prohibited persons; not these rules. Although the Department appreciates the concern of the commenter, the Department is compelled to impose these obligations.

Regarding the issue of "grandfathering" existing employees, the Department notes that the Act makes no provision for a unilateral waiver of all currently employed prohibited persons. As noted by the NAIC Guidelines, "these statutes make no exception for these individuals. They are all prohibited persons." Hence, all prohibited persons, even those currently employed in the business of insurance, must obtain a waiver.

4. COMMENT: Several commenters expressed their objection to the definition of "felony" as stated in N.J.A.C. 11:17E-1.2 claiming that it improperly expands the classification of criminal convictions that are subject to the waiver requirements.

RESPONSE: As proposed, the definition of "felony" includes:

The Department’s definition of felony is predicated upon the federal definition of "felony" established in 18 U.S.C. § 3559(a). That section provides that any offense for which the maximum authorized term of imprisonment is more than one year incarceration is considered to be a felony. Offenses for which the maximum authorized term of imprisonment is one year or less are classified as misdemeanors. Thus, the term "felony" when used in the Act means any offense for which the maximum authorized punishment was more than one year. The definition of "felony" therefore rests upon a determination of the maximum punishment authorized for the offense charged.

On September 1, 1979, the Model Penal Code, N.J.S.A. 2C:1-1 et seq. became effective in New Jersey. N.J.S.A. 2C:1-4 and 2C:43-1 state that all criminal offenses are defined as crimes of the first, second, third or fourth degree. New Jersey does not recognize "felonies" as a class of crimes but rather divides criminal offenses into degrees of severity and allocates different maximum authorized punishments for each degree of offense.

N.J.S.A. 2C:43-6a provides that crimes of the first degree shall have a sentence fixed by the court of 10 to 20 years. Crimes of the second degree shall have a term of imprisonment between five to ten years. Crimes of the third degree shall have a maximum punishment between three to five years and crimes of the fourth degree shall have an authorized punishment not to exceed 18 months. Thus, all New Jersey criminal offenses have a punishment which exceeds one year and are classified as felonies within the meaning of 18 U.S.C. § 3559(a).

Prior to September 1, 1979, offenses in New Jersey were divided into high misdemeanors and misdemeanors pursuant to N.J.S.A. 2A:85-6 and 2A:85-7. Unless otherwise provided, the punishment for a high misdemeanor was not more than seven years confinement and for a misdemeanor was not more than three years confinement. Thus, persons convicted of a high misdemeanor or a misdemeanor in New Jersey prior to September 1, 1979 would have been convicted of a felony for which a waiver is required.

Regarding disorderly persons offenses and petty disorderly persons offenses, N.J.S.A. 2C:43-8 provides that the maximum authorized confinement shall not exceed six months in the case of disorderly persons offenses and 30 days in the case of petty disorderly persons offenses. Hence, these offenses are not felonies for which a waiver is needed.

Regarding offenses occurring outside of the State of New Jersey, the definition of "felony" as provided in N.J.A.C. 11:17E-1.2 offers a predictable and easily discernable means for determining if the offense is a felony.

It should also be noted that the offense must have resulted in a conviction. Thus, conditional discharges, pre-trial intervention and other diversionary programs do not result in a conviction and do not require a waiver.

In consideration of the foregoing, the Department does not agree with the commenter that changes in the definition of "felony" are necessary.

5. COMMENT: One commenter stated that the rules do not comply with the Act’s legislative intent which the commenter claims is to protect consumers and insurance companies from white collar crime and to avoid insurer insolvency. Specifically, the commenter stated that the provisions of N.J.A.C. 11:17E-1.1 and 11:17E-1.3 which state that the subchapter applies to any person employed in any capacity in the business of insurance, exceeds the commenter’s understanding of the intended purpose of the Act. According to the commenter, the Act does not cover all persons but only insurance representatives and insurance executives.

RESPONSE: The purpose of the Act, as understood by the Department, is to require all prohibited persons from participating in the business of insurance in any capacity unless a waiver has been obtained. As stated in the Act, the term "business of insurance" means the writing of insurance or the reinsuring of risks by any insurer including all acts which are necessary or incidental to such writing or reinsuring by any person who is an officer, director, agent or employee of an insurer. As a result, the Department, consistent with the NAIC Guidelines, has adopted the same broad interpretation of the term "business of insurance". Therefore, any prohibited person employed by any individual or company engaged in any insurance related business must obtain a waiver.

This does not mean, however, that those employees engaged in clerical or administrative details can and or will be subjected to the same degree of vigilance as licensed individuals or other persons dealing with the financial structure of the business or with the public.

The Department has included two separate applications for waiver that can be used, at the discretion of the Department, depending on the nature of the offense(s) and the nature of the prohibited person’s prospective job responsibilities. The initial application for waiver, Appendix Exhibit A, is used by all applicants for waiver and may be sufficient to satisfy the Department’s inquiry in those cases where the nature of the employment or the nature of the offense indicate a lesser degree of scrutiny. In those instances where the job responsibility of the prohibited person is such that a greater degree of inquiry is necessary or where the nature of the criminal history dictates a greater degree of concern, the Department will require the applicant to come forward with more information (see Appendix Exhibit B).

6. COMMENT: One commenter asked what degree of inquiry is sufficient for employers to satisfy their requirement to not willfully employ convicted persons in the business of insurance. For instance, the commenter asked if local or national background checks are required or if questions regarding prior criminal history are sufficient on an application for employment.

RESPONSE: In most instances, the normal questions on applications for employment will be sufficient inquiry for an insurer to comply with these rules. In the case of licensed producers, brokers, management general agents and public adjusters, the Department conducts local and national criminal background checks which can be relied upon by the employer. In the case of clerical, ministerial, or administrative employees, questions on an application for employment will be sufficient to comply with an employer’s obligation. Where the prospective employee is not licensed but is going to be employed in a position of greater trust and responsibility, the degree of inquiry by the employer must, of necessity, be greater. In such cases, further inquiry beyond the normal questions asked in employment applications is usually warranted. These may include primary verification of prior employment history and direct contact with personal references.

7. COMMENT: One commenter claimed that N.J.A.C. 11:17E-1.3(a) and (b) are illegal and should be deleted by the Department. The commenter stated that state regulators do not have the authority to incorporate substantive Federal law into State regulations. The commenter claims that the Commissioner does not have authority under the law to incorporate substantive Federal crimes into substantive State crimes. Rather, the Act requires that regulators only establish procedures to review applications for waiver, and in appropriate cases to permit the applicant to engage in the business of insurance. Neither Federal nor State law, according to the commenter, authorizes the Department to make it a state offense for certain felons to engage in the business of insurance without a waiver.

RESPONSE: The Department disagrees with the commenter. These rules do not and cannot establish a crime under State or Federal law. The Department, as correctly observed by the commenter, does not have the power or authority to make conduct into a criminal offense. However, the Department has the authority and obligation to provide for the financial soundness and the economic safety of insurers and consumers and to ensure that insurers are not in violation of Federal criminal law. The Act provides that it is a Federal crime for any employer in the business of insurance to willfully employ a prohibited person. The Department has an absolute right to insist that insurers do not commit Federal crimes and, thus, the Department has full and complete authority to impose these administrative requirements.

Full text of the adoption follows (additions to proposal indicated in boldface and underline with asterisks *thus*deletions from proposals indicated in brackets with asterisks *[thus]*):



11:17E-1.3 Prohibited activities; requirement to obtain waiver; determination of appropriate state

(a) (No change.)

(b) No insurer, producer, limited insurance representative, or any other person or independent contractor *[operating a business directly or indirectly]* involved in the business of insurance in this State shall employ any prohibited person in any capacity without having first ensured that said prohibited person has obtained a waiver in accordance with 18 U.S.C. § 1033(e)(2) and this subchapter.

(c) – (d) (No change.)