Restrictions on Hiring Personnel with Criminal Histories in the Insurance Industry

Over the last several years, federal and state governments have pushed employers to reemploy offenders, such as through tax incentives and subsidized training. Despite the public interest in such initiatives and programs, the insurance industry should take caution and consider specific, ongoing statutory obligations regulating or barring employment of individuals with certain criminal records. 

Insurers should review their post-offer screening processes for prospective employees and agents to ensure each hiring or engagement is contingent on confirmation of eligibility to work under 18 U.S.C. § 1033 (Section 1033). Section 1033 was passed as part of the Violent Crime Control and Law Enforcement Act of 1994. The statute prohibits individuals who have been convicted of a felony “involving dishonesty or a breach of trust,” or an offense listed under Section 1033 (which includes, among others, embezzlement and theft), from engaging in the “business of insurance” without the written consent of an insurance regulatory official. 18 U.S.C. § 1033(e). Section 1033 also prohibits those engaged in the insurance business from permitting individuals covered by the above categories to engage in the “business of insurance.” Id. Violations may lead to various consequences including a civil penalty of up to $50,000 for each occurrence. 18 U.S.C. § 1034.

Section 1033 defines “business of insurance” broadly as “the writing of insurance,” or “the reinsuring of risks, by an insurer,” including “all acts necessary or incidental to such writing or reissuing.” 18 U.S.C. § 1033(f)(1).

Therefore, to comply with Section 1033, an insurer must determine whether the role of a prospective employee or agent will involve the “business of insurance” and, if so, whether that individual has been convicted of a crime involving dishonesty, breach of trust or a violation of Section 1033. Crimes involving dishonesty generally include some element of deceit or falsification, such as perjury, fraud, embezzlement, theft or bribery. Crimes involving a breach of trust often are based on a wrongful act violating the fiduciary relationship — for example, an estate executor who misappropriates estate funds. To compound things further, a conviction may cover certain deferred sentences and may, or may not, be subject to expungement laws.

To be sure, an insurer may still hire or engage an individual with a disqualifying Section 1033 conviction if the prior written consent is obtained from governing insurance regulatory officials. To obtain consent, called by some a Section 1033 waiver, the individual must complete and submit the application materials required by each governing state’s insurance commissioner or regulatory body. The National Association of Insurance Commissioners Guidelines explain that a prospective employee should apply in the state where the applicant’s most substantial work will be performed (if applicable) or the insurance company’s state of domicile. Individuals who are applying for a license as a producer or other licensed insurance professional should apply in the state issuing the resident license.

Although an individual must apply for a waiver herself, an insurer may need to assist in the process. For example, Pennsylvania’s waiver application requires a sworn affidavit from the insurer’s president or designated officer, as well as details about the proposed employment or business relationship with the insurer.

Because of the sensitivity associated with using criminal history data, the regulations affecting background checks and consumer credit act compliance, and employment discrimination laws that limit if not prohibit use of arrest and conviction records as racially discriminatory, the intersection of those issues makes Section 1033 compliance even more difficult. For example, the U.S. Equal Employment Opportunity Commission has explained that although Title VII (the federal anti-discrimination law) does not preempt federally imposed restrictions governing the employment of individuals with specific convictions, policies that impose exclusions beyond those restrictions may be subject to Title VII analysis.

Therefore, each insurer should regularly evaluate its recruiting, screening, hiring and onboarding processes to comply with best practices in the human resources profession, to adhere to employment discrimination laws and to avoid violations of Section 1033. That includes understanding waiver requirements to learn what information may be required for an individual’s waiver application and to assist the individual with the application process. Insurers also should be prepared to explain and defend the processes used for screening applicants if ever challenged under anti-discrimination laws or other theories.