An Update on the Red Flag Requirements for Insurance Agents

January 17, 2011

President Obama signed into law in mid-December 2010 the “Red Flag Program Clarification Act of 2010.”  Several years ago, the Federal Trade Commission (FTC) adopted “Red Flag Rules,” intending to enforce the provisions of the Fair and Accurate Credit Transactions Act.  The Rules required certain creditors, as well as financial institutions, to develop and implement written identity theft prevention programs.  The programs had to provide for the identification, detection and response to patterns, practices or specific activities – known as “red flags” that could indicate identity theft.

Following adoption of the Rules, questions were raised as to what types of “creditors” were subject to the Rules.  Banks, credit card companies, persons extending consumer credit, etc. are all obvious creditors.  However, what about attorneys?  What about accountants?  What about physicians?  What about insurance agents?  All of the foregoing can become creditors in the right circumstance.  The FTC contended that lawyers, accounting firms and similar service providers are creditors because they extended credit by performing work that would be billed later on.  The American Bar Association successfully challenged the Red Flag Rules in federal court.  Moreover, a number of trade groups went to Congress and requested clarification of the law.

The Red Flag Program Clarification Act of 2010 clarified the definition of “creditor.”  The Act provides that a creditor “. . . does not include a creditor . . . that advances funds on behalf of the person for expenses incidental to a service provided by the creditor to that person.”  The Congressional intent is to remove attorneys, accountants, physicians and other professionals who render services, from having to comply with the provisions of the Red Flag Rules.  By extension, an insurance agent provides a “service” to a risk in terms of procuring a particular insurance product or service.  To the extent that prospect becomes indebted to the agent for the services performed, that debt relationship should not trigger creditor status of the agent under the Red Flag Rules.