Federal Rules for Participating in the Insurance Business

Federal Insurance Misconduct: Who May Participate and What Penalties Apply

What This Lesson Helps You Do

By the end, you should be able to:

• Decide whether a past conviction triggers the federal restriction on working in insurance.
• Name who can give the written consent that lifts that restriction.
• Sort misconduct into four types: false reports to regulators, false book entries, embezzlement and obstruction. Recognize when one act fits more than one type.
• State the maximum prison terms, and explain why they are maximums, not required sentences.
• Tell a criminal case apart from a civil penalty or an injunction.

Prerequisites: none. Legal terms are explained as they come up.

The Central Idea

A federal law, 18 U.S.C. § 1033, does two jobs. It makes certain dishonest acts in the insurance business federal crimes. It also limits who may work in that business after certain convictions. A companion law, § 1034, lets the federal government take civil action as well.

Two terms come up throughout:

• Criminal case: the government prosecutes someone for a crime. A conviction (a court finding of guilt) can bring a fine, prison or both.
• Civil case: a lawsuit that can bring money penalties or court orders, but not prison.

When This Federal Law Applies

The law covers people "engaged in the business of insurance whose activities affect interstate commerce."

Business of insurance: an insurer writing insurance (issuing policies) or reinsuring risks (taking on risk from another insurer). It also includes acts needed for that work or connected to it. And it covers the officers, directors, agents and employees of insurers, plus others authorized to act for them. It does not cover every job at every company. A cashier at a hardware store is not covered just by having a job.

Interstate commerce: business that crosses state lines. The law also counts commerce within D.C. or a U.S. territory, trips between two points in one state that pass outside it, and other commerce the federal government has authority over.

The Participation Restriction

The rule: A person who has been convicted of either of the following may not willfully work in or take part in the business of insurance:

1. any felony (a crime in the law's more serious category; each scenario below tells you when a conviction is a felony) involving dishonesty or a breach of trust, or
2. any offense under § 1033 itself.

Breaking this rule is a crime with a maximum of 5 years in prison, a fine, or both.

Dishonesty, in everyday terms, means lying, cheating, stealing or deceiving others. Fraud and taking money that isn't yours are typical examples.

Breach of trust means misusing a position where others relied on you, such as handling someone else's money.

These everyday meanings help you spot likely cases. Whether a particular conviction legally counts can depend on the offense and its facts, so this lesson does not try to classify every crime.

Willfully is the statute's word for the required mental state, both for participating and for permitting participation. Its full legal meaning comes from sources beyond this lesson, but accidental conduct is not enough.

A second person can also be guilty. Someone in the insurance business who willfully permits a restricted person to participate faces the same 5-year maximum. Deliberately permitting the participation can trigger the provision, even though that person is not the one participating.

The exception: The restricted person may participate with written consent from an insurance regulatory official who is authorized to regulate the insurer. The consent must specifically refer to subsection (e) of § 1033.

An employer, manager or coworker cannot give this consent. Spoken approval does not count either.

Worked Comparison

An insurer's agency is hiring. Two applicants have felony convictions. (These are fictional examples.)

• Dana was convicted of a felony for secretly taking money from a former employer. Taking money entrusted to you is dishonest and a breach of trust. The restriction applies. Dana needs written regulatory consent that refers to subsection (e).
• Lee was convicted of a felony whose facts involved no dishonesty or breach of trust. This particular restriction does not reach Lee on these facts. The test is not "any felony." It is the type of felony.

Now change one fact. Suppose Lee's conviction was instead under § 1033, for misappropriating $3,000 in premiums. For that amount, the prison maximum is only one year. The restriction still applies, because any conviction under § 1033 triggers it, whatever the sentence size.

Tempting mistake: "The agency owner said Dana can start, so it's fine." No. Only an authorized insurance regulatory official can consent, in writing, referring to subsection (e). If the owner deliberately permits Dana to participate without that consent, the owner risks the "willfully permits" offense.

Check: Pat was convicted of a felony for forging signatures on financial documents. An insurer's regional director sends Pat an email: "You're cleared to work here." Can Pat participate?

Answer: Not on that approval

Forgery involves dishonesty, so the restriction applies. The director works for the insurer and is not an insurance regulatory official, so the email is not valid consent. It also does not refer to subsection (e). Pat needs written consent from an authorized regulator that specifically refers to subsection (e).

Four Types of Misconduct

Each offense requires a mental state (what the person knew or intended), such as acting knowingly, willfully, with intent to deceive, or corruptly. That requirement is what separates these crimes from honest errors.

• False statements to regulators, § 1033(a): Someone knowingly makes a false material statement or report, with intent to deceive. Or they willfully and materially overvalue land, property or securities. The false information appears in financial reports given to regulators or their examiners, to influence their actions. Material means important enough to matter.
• False book entries, § 1033(c): Someone knowingly makes a false entry of material fact in a company book, report or statement. The goal is to deceive anyone about the business's financial condition or solvency (ability to pay its obligations). "Anyone" includes the company's own officers, and also regulators and their examiners.
• Embezzlement, § 1033(b): Someone willfully takes or misuses an insurance business's money, premiums, credits or other property.
• Obstruction, § 1033(d): Someone uses threats, force or threatening messages to corruptly interfere with a proceeding pending before an insurance regulator or examiner. Corruptly means acting with an improper purpose to obstruct or influence that proceeding.

Who (b) and (c) reach: Both cover people in the insurance business, such as insurer officers, agents and employees. Both also reach someone outside the business who is involved in a transaction relating to its affairs. That outside-participant branch excludes a person involved only as an insured (someone a policy covers) or a beneficiary (someone named to receive a policy's benefit). The exclusion does not protect a person who fits another category. An insurer's officer who also owns a policy is still covered as an officer.

How (a) and (c) relate: These two can overlap, and one act can violate both. Do not sort them by who was fooled. Check each one's requirements instead:

• (a) needs a false material statement or report, or a willful, material overvaluation, in financial reports or documents presented to regulators or their examiners, made for the purpose of influencing them.
• (c) needs a false entry of material fact in the insurer's own book, report or statement, made to deceive any person about its financial condition or solvency. That person can be a company officer, a regulator or an examiner. (c) is not limited to internal ledgers; a report the insurer sends to a regulator is one of its reports.

So a false entry in an insurer's report, sent to an examiner to influence that examiner, can satisfy both. A false entry in internal records meant only to fool the company's board fits (c) but not (a), because nothing was presented to a regulator.

Honest mistakes: Suppose an employee mistypes a number in a report and does not know it is wrong. That person lacks the required intent. Careless work may break other rules, but it is not the same as these intentional federal crimes.

Check: An office manager quietly moves premium payments into a personal account. Separately, a company officer sends a threatening letter to a state examiner to stop a pending review. Which categories apply?

Answer: Embezzlement and obstruction

Moving premiums into a personal account is willful misappropriation of company property, so it is embezzlement under (b). The threatening letter aimed at a pending regulatory proceeding is obstruction under (d). Neither involves a false report or a false book entry.

Prison Maximums Are Ceilings

Every offense also allows a fine as provided in Title 18. The maximum prison terms are:

• (a), (b) and (c): up to 10 years. The maximum rises to 15 years in one situation: the misconduct jeopardized the insurer's safety and soundness and was a significant cause of a court placing the insurer in conservation, rehabilitation or liquidation. In plain terms, a court took control of the troubled insurer or ordered it wound down.
• (b) embezzlement of $5,000 or less: up to 1 year.
• (d) obstruction: up to 10 years.
• (e) prohibited participation, or permitting it: up to 5 years.

"Up to" means the law sets a limit. It does not set a required sentence, and the limits are not all the same.

Check: Answer three parts. (These are fictional examples.)

1. Sam, an insurer's finance officer, records fake assets in the company's internal ledger so the board believes the insurer can pay its obligations. Nothing is sent to a regulator. Riley, at another insurer, knowingly overstates a building's value in a financial report sent to a state examiner, to persuade the examiner to close an inquiry. Which subsection fits each?
2. Riley's overvaluation jeopardized the insurer's safety and soundness and was a significant cause of a court ordering the insurer into liquidation. What is the prison maximum?
3. A clerk willfully misappropriates $4,000 in premiums. What is the prison maximum?

Answer: Sam (c); Riley (a) and (c); 15 years; 1 year

1. Sam's false entry is in company records and aims to deceive the board about solvency, so it fits (c). It does not fit (a), because nothing was presented to a regulator or examiner. Riley's false valuation is in a financial report presented to a regulator's examiner, made to influence the examiner, so it fits (a). It can also fit (c): the overstated value is a false entry of material fact in the insurer's own report, meant to deceive the examiner about the insurer's financial condition. A tempting error is to rule out (c) because a regulator was the one being deceived. (c) covers deceiving regulators and examiners too.
2. Up to 15 years, because both conditions are met: the overvaluation jeopardized safety and soundness and was a significant cause of the court's liquidation order. (a) and (c) use the same 15-year rule, so the answer is the same under either. If the insurer had been liquidated for other reasons, the ceiling would stay at 10 years.
3. Up to 1 year, because the amount does not exceed $5,000. A tempting error is to apply the general 10-year ceiling for (b).

Civil Penalties and Injunctions Under § 1034

The U.S. Attorney General (the head of the federal Department of Justice) may also sue in federal district court.

Civil penalty: The Attorney General must prove the conduct by a preponderance of the evidence, meaning it is more likely true than not. The statute sets a ceiling for each violation. The penalty may be up to whichever is greater:

• $50,000, or
• the compensation the person received for the prohibited conduct or offered for it.

If the offense contributed to a court ordering conservation, rehabilitation or liquidation of an insurer, the penalty goes to the regulator. The regulator uses it for the insurer's policyholders, claimants and creditors.

Injunction: A court order that prohibits the person from engaging in the conduct. The court may issue one if it finds that the conduct is a § 1033 offense.

Not exclusive: A civil penalty or an injunction request does not block other remedies, including criminal prosecution.

Check: For one violation, an agent received $80,000. What is the statutory-text ceiling on the civil penalty? Does a civil penalty prevent a criminal case?

Answer: $80,000, and no

The ceiling is the greater of $50,000 or the compensation received ($80,000), so it is $80,000. A civil penalty does not prevent criminal prosecution or other remedies.

Summary

• The restriction is triggered by a felony involving dishonesty or breach of trust, or by any § 1033 conviction. Not every felony triggers it.
• Willfully participating, or willfully permitting a restricted person to participate, carries up to 5 years. Accidental conduct is not enough.
• Only written consent from an authorized insurance regulatory official, referring to subsection (e), lifts the restriction.
• The four offenses each require a mental state: false reports to regulators (a), false book entries (c), embezzlement (b) and obstruction (d). (a) and (c) can overlap: a false entry in an insurer's report made to influence a regulator can fit both.
• For (b) and (c), someone involved in a transaction only as an insured or beneficiary is outside the outside-participant branch.
• Prison terms are ceilings: generally 10 years, 15 when the misconduct jeopardized the insurer and significantly helped cause a court takeover, 1 year for embezzlement of $5,000 or less, and 5 years for prohibited participation.
• Civil remedies add to criminal ones; they do not replace them.

Sources

• 18 U.S.C. § 1033, subsections (a)–(f). https://uscode.house.gov/us/usc/119-118/t18/s1033/ (checked 2026-11-05; text current through Pub. L. 119-120, Oct. 7, 2026)
• 18 U.S.C. § 1034, subsections (a)–(b). https://uscode.house.gov/us/usc/119-118/t18/s1034/ (checked 2026-11-05; same currency)