A Primer on the Representation of Insurance Agents
Insurance agents, sometimes also referred to as insurance agents of record or brokers, have a multifaceted role in the sale and procurement of insurance policies and products. While generally acting as the sales representatives for various insurance companies—particularly when it comes to procuring such products for their clients—they do have a responsibility to the insured in certain respects, including understanding the insured’s needs, whether through an informal meeting or formal application process, collecting information (generally through a questionnaire), and communicating the relevant information to the insurance company on its behalf. This communication, however, typically can be completed in a way that does not require the agent to act for, or on behalf of, the insured. If that is the case, and absent some specific communications or acts to the contrary , communicated through an application or otherwise, the agent is not an agent of the insured.
Additionally, insurance agents tend to be paid a commission directly by the insurance company for the policies and products placed. An insurance broker, on the other hand, tends to be a representative of the insured. That is, a broker is paid by the insured for the work it performs in obtaining insurance coverage for the insured.
Another aspect that may impact whether the agent will be deemed to be an agent for the insured occurs if the agent "interfer[es] with the insurer’s right to exercise its option to inspect for underwriting purposes." Thus, an agent may be deemed to be an agent of the insurer for purposes of binding coverage or for allegations of rescission if it "affects the insurer’s decision to issue the policy."
Captive Versus Independent Agents
The difference between these two types of insurance agents matters because it determines who the agent legally represents. An insurance agent is a person or business authorized to sell insurance policies on behalf of an insurance company. All insurance agents do not represent a single insurer. There are two different types of insurance agents: captive agents and independent agents.
An agent who operates as a captive agent sells insurance products from a single insurance company. An independent agent is someone who can offer coverage for multiple insurers. Captive agents have a legal duty to sell in the best interest of the company they represent. An agent’s legal responsibility to the insurer is to help the insurer sell as many policies as possible while also making sure that the insurer does not get hooked into insuring high-risk clients. There are obviously incentives to keeping claims to a minimum and maximizing profitability. Captive agents work for themselves, but they are also really just working for the insurance company that hires them.
Independent agents, on the other hand, act as a third party between the insured and the insurer. They are not tied to any one particular insurance company, but they are not free to do as they please either. Independent agents must adhere to an ethical and legal standard known as fiduciary duty. Fiduciaries must remain loyal to the company regarding all matters that might affect the company’s interests. They must follow and uphold the law. An independent insurance agent has an obligation to the insured to be the "eyes and ears" of the insured.
Independent agents have a strong incentive to place business with upstanding companies which have ethical claims payment practices. Since they are entrusted by their clients, independent agents must be trustworthy. By selling insurance, an insurance agent assumes a relationship of trust and confidence with the insured. The goal is to protect the customer’s interests when providing them advice. An independent agent sells insurance for more than one insurance company or will probably specifically offer a policy from a single company.
Who Do Captive Agents Legally Represent?
Captive insurance agents are typically exclusive agents to a single carrier, and they have a duty to represent their carrier. It is important to understand that this duty usually comes in the form of the agents’ obligations to their carrier, not to the public. Every captive agent has what is called an agency agreement with his or her carrier. In that agreement, both the agent and the carrier promise to do certain things in exchange for receiving commissions on the premiums paid for the policies sold. The agent promises to sell as many policies as possible, up to a certain limit; the carrier promises to pay the commissioned premiums and supply the contractual insurance. If all goes as planned, the agent receives commissions and the insured enjoys the insurance protection.
It is similarly important to understand that an insurance agent does not represent the public; he or she only represents the insurance company. Agents have an obligation to be honest with their clients, but not at the expense of misrepresenting the terms of a policy. To this end, an agent has no duty to "match the highest possible level of coverage" if the insured does not ask for it. If the carrier sold a policy with certain limits, then the agent must keep selling that same level policy—there are no exceptions.
I once represented a person who hired an agent to find an insurance policy for an expensive watch collection. The agent, however, recommended a less expensive but less comprehensive policy to the client because the agent would receive a better commission from the insurer. The agent failed to notify his client of the poor policy limits so the policyholder had to pay for a new policy when the watch collection was lost. Even though this claim reached the carrier, the agent was ultimately responsible for the loss incurred by the policyholder.
Another example is the case of Twin City Fire v. Koloms. There, the insured had a fire-loss claim under a business-interruption policy. During negotiations, the insurance company made a settlement offer to the policyholder and the policyholder’s agent. The claim was later rejected by the policyholder—either directly to the carrier or through his agent—yet the case went to arbitration and resulted in a $1.7 million award for damages to the insured. The carrier refused to pay the award and argued that the policyholder forfeited his rights under the policy when he failed to accept the carrier’s offer of $225,000. The trial court agreed and entered summary judgment in favor of the carrier. Without deciding the merits of the appeal, the appellate court vacated the trial court’s judgment and remanded the case for further proceedings. The appellate court noted that the policyholder’s agent was a captive agent who represented the insurer and there was a genuine issue of material fact as to whether the policyholder actually rejected the settlement amount to the insurer or to another agent of the same insurer via his agent.
Legal Representation of Independent Agents
With the consumers’ now having a better grasp of shopping for insurance and with independent agents competing with the internet, it is vital that we understand clearly just who is it that that they are selling.
An agent who sells policies from multiple insurers is called an independent agent. These insurance salespeople typically own their own agencies and earn a commission on the policies they sell. In addition, independent agents also write auto and other classes of business where they represent some, but not all, carriers who have issued these policies. The critical point here being that the independent agent legally represents the interests of the carriers who issued the policy.
The standard contract between the independent agent and the carriers is called an appointment. This document is standard across carriers although there are slight variations in provisions among carriers. In particular, all appointment agreements have a cancellation provision. A carrier may cancel the appointment at any time, without cause, seeing any reason, upon providing the named agency with the requisite notice. The appointment will generally be canceled as to any named individual agent at such time that said individual is no longer employed by the agency appointed.
Although the process is somewhat different, the independent agents are much like employees of the carrier. These independent agents must abide by rules and regulations set forth in their appointment contracts. Appointed independent agents are considered indirect agents of the carrier and can make and bind coverage subject to limits set for various accounts/class codes.
Like the carrier’s employees, the independent agent or agent working under an agency appointment will act on behalf of the carrier when placing the insurance coverage, handling insurance claims and/or in the termination of coverage.
Practical, Legal and Ethical Implications
The law governing agents and brokers generally views the agent as working on behalf of his or her client. While insurance brokers and agents have legal and ethical obligations to disclose their relationships with carriers, they also have a common law fiduciary duty to act in the best interests of their clients. So great is the concern for agency abuses that many states require agents and brokers to be licensed before selling insurance and to complete continuing education programs, and many have enacted legislation specifically defining the role and responsibilities of brokers and solicitors. Those states also have adopted "vicarious tort liability" provisions that generally hold an agent or broker, along with the agency or brokerage, liable for negligent acts committed by the agent or solicitor while acting within the scope of his or her actual authority.
Liability has been used to recover against agents for numerous torts under theories of vicarious liability , breach of fiduciary duty, breach or violation of a statute, and breach of contract. Agents as fiduciaries and agents and agencies under vicarious liability principles are also subject to liability for the negligence, acts, or omissions of another broker or agent employed by, representing, or associated with them in the same or different agency or brokerage.
Independent agents have also served as outside representatives for insurance companies that have become targets of bad faith lawsuits, some of which are designed to increase the damages to the defendant carriers. State and federal courts are recognizing the distinct legal identity of insurance agents and brokers, rejecting arguments that they are in the same business as their employers.
How an Agent’s Representation Affects the Claimant Policyholder
The impact of an agent’s representation on a policyholder varies based on whether he or she is dealing with a captive or independent agent. Captive agents, who are paid a salary or hourly wage and earn commissions for personal lines insurance products they sell, often represent only one insurance company even if the insurer marketing its policies through its agents refers to agents as "independent agents." Such agents will have more familiarity with the insurer’s products, however, they will also likely be more biased toward their employer/insurer than independent agents. Consumers should be cautious of captive agents when being encouraged to purchase one carrier’s products over another with no adequate explanation of the differences.
Independent agents, who now commonly refer to themselves as "brokers" and generally earn only commissions on the sale of insurance products, customarily represent multiple carriers. This not only provides opportunities for comparison and competition but also creates a potential conflict of interest when one or more of the companies the agent represents is affiliated with one or more of the companies whose policies are marketed by competing agents. The agent’s financial compensation may create an incentive to steer claims from the unaffiliated companies to the affiliated company, rather than allowing the policyholder to choose the insurance company they would like to represent their claim.
Policyholders often want to trust that when they engage the services of a broker, they are hiring someone who will put the policyholder’s interests above all others. However, the law does not bind a broker to fiduciary obligations owed by an attorney to a client.
In certain circumstances, a broker employed to shop around insurance quotes may owe a fiduciary duty to a prospective insured; however, where there is no express agreement between the parties to the insurance contract that the broker owes a fiduciary duty to a policyholder, no such duty exists. Rather, the relationship between an agent and a policyholder is a contractual one and governed by what the parties agreed.
A key issue for policyholders is whether a broker or agent breached common law duties to the policyholder, or duties arising out of a statute. These duties include: (1) statutory duties under state insurance laws; (2) fiduciary duties to obtain the best possible policy terms for the policyholder; (3) express and/or implied-in-fact duties to act with reasonable care; and (4) implied duties to act in good faith and deal fairly with a policyholder.
How to Figure Out Who Your Agent Represents
Making informed decisions about the insurance you buy requires understanding which choices are yours to make and which ones are the responsibility of the agent. Unfortunately, your insurance agent may not know who he represents. He may believe he represents you, as his paying customer, when in reality he represents the insurance company that pays him a commission for his services. He may not be aware that his role on your behalf is different than his role on behalf of the company.
Either way, if you don’t know who he represents, you can’t understand the differences in services and costs or make the best buying decisions about your insurance.
The solutions to this problem are knowing:
In case you haven’t figured it out already, an agent may represent either you, the buyer, or the company. He can’t represent both. If he does, you can count on him to put his interests first and consider what’s good for you secondary, if at all. You can determine which category your agent fits into with these three steps:
Three Ways to Know Who Your Insurance Agent Represents
Ask your insurance agent, but don’t stop there. Ask in writing. Pay attention to how he answers. Strive to get him to admit that he represents your interests, not the company’s. He may deny that he represents anyone but you, but don’t take that as gospel. Get him to put his answer in writing. This will allow you peace of mind and will also provide a record if you ever need to hold him accountable.
Ask for the policy that he recommends. Hint: it will be from just one company. When he hands you the policy, ask him if he represents other insurance companies and why he only sells policies from one insurance company.
Get copies of the agent’s agreement(s) with the insurer(s). Read them. Analyze how they read to someone who does not already know what you already know about how commissions work. I would be surprised if a typical insured could tell from reading an insurance agent’s contract with a large insurer who the agent represents. In fact, I find it hard to tell and I do this for a living. So probably you can’t tell, either. How could you be expected to be smarter than a room full of lawyers?
Conclusion – The Maze of Insurance Agent Representation
We have attempted to clear up the confusion over who the insurance agent actually represents. It is not uncommon for insurance agents to misrepresent themselves as being "your agent" when they may not be your agent at all but rather are independent agents representing other insurance companies; and may even be life/health/surplus lines agents in addition to property & casualty agents.
Because insurance agents and brokers can represent both carriers and insured, those in the insurance business have different levels of fiduciary obligations to customers. In some states, agents have a fiduciary duty to the customer-in other states agents essentially have no fiduciary duty. This is one reason why determinations of coverage can be so different in each state .
Further complicating the insurance picture is the fact that agents set their own fees. In fact, an agent’s fee agreement with the carrier may state the agent will receive a fee as a percentage of the premiums. If you put a financial incentive in place, can you really expect independent agents to "gun for your interest?" Or should we be more concerned about agents "gun for their own interest?" The potential for conflicts of interest is ever present.
This is important to bear in mind because those who sell insurance insist they will work with you, "as your agent," to help find you the best coverage; however, having an agent who is actually "your agent" is far better than having an agent with no fiduciary duty to you. If you are going to pay for an agent, you should certainly want one whose primary responsibility is to YOU.
