What Are an Insurance Agent's Legal Obligations?
Agents' Responsilities Vary by State
Insurance agents and brokers are intermediaries who facilitate the sale of insurance policies. Generally, brokers represent insurance buyers while agents act on behalf of insurers. Nevertheless, agents and brokers perform similar functions and have similar obligations to insurance buyers.
Insurance regulatory departments often refer to insurance agents and brokers as producers. The name derives from the fact that agents and brokers produce income from commissions they earn by selling policies. Insurance agencies and brokerages sometimes use the word producer to mean an individual who engages in sales rather than servicing clients. For the purpose of this article, producer simply means an agent or a broker.
Common, State, and Contract Law
Insurance agents and brokers are governed by common law, state law, and contract law. Common law requires producers to act in good faith, to exercise reasonable care and diligence, and to carry out the client's instructions. State laws determine the licensing requirements producers must meet. These laws are enacted by state legislatures and enforced by state insurance departments.
Both agents and brokers sign contracts with insurers. Called producer agreements, these contracts outline the producer's authority and responsibilities as well as the commissions the insurer will pay. Insurance brokers may also engage in contracts with clients that describe the services the broker will provide. If a producer fails to comply with the provisions of a contract with an insurer or client, it may be subject to a fine or other penalty.
All states require insurance agents and brokers to obtain a license to sell insurance. The type of license a producer needs depends on the kind of insurance the individual intends to sell. For instance, a producer who wants to sell life and health insurance will need Life and Health license. Similarly, a producer wishing to sell property and casualty insurance will need a Property and Casualty license.
In most states, producers must complete a specified number of hours of pre-licensing education to obtain a license. A license is typically valid for two years. To renew a license, a producer must fulfill the continuing education requirements imposed by his state's insurance department.
Be sure your agent or broker has a valid license! You can verify a producer's status by contacting your state insurance department.
Duties and Responsibilities
Producers' obligations to their clients vary from state to state. In most states, producers are considered "order takers". They must comply with their clients' wishes and obtain the coverages clients have requested. Producers must be reasonably diligent in obtaining those coverages and inform the client if they have been unsuccessful. If they fail to fulfill these duties, they may sued by their clients for damages.
Most agents and brokers are not professional risk managers. They rely on you to provide accurate information about your business.
For example, suppose your company has just bought a warehouse, its first physical location. You tell your insurance agent you want a commercial property policy that includes building ordinance coverage. You emphasize that you need building ordinance coverage because building codes change frequently in your area. You receive your policy shortly thereafter.
Six months later, your warehouse is badly damaged by a fire. You file a property claim with your insurer but the amount you receive for the claim is substantially less than you expected. Your agent failed to include building ordinance coverage in your property insurance application. If you sue your agent for negligence, he may be liable for the amount you would have collected under building ordinance coverage had the coverage been included.
Agents are Not Advisors
Most states don't require a producer to determine the coverages your business needs, inform you of all the options available, or recommend specific amounts of insurance. A producer need not monitor your business for changing circumstances to ensure it has the proper coverage. However, an exception may apply when you and your producer have a special relationship.
When a producer has a special relationship with a client, his duties to that client expand. A special relationship may exist if the producer does any of the following:
- Misrepresents the nature of the coverage provided. For instance, your agent says your property policy covers damage caused by earthquakes but earthquake coverage isn't included.
- Voluntarily determines the coverages you need
- Provides advice about the types of policies that are available and the exclusions they contain
- Presents himself as a specialist. For instance, your agent tells you he's an expert in insurance for restaurants.
- Charges a fee for his advice
- Has maintained a longstanding relationship with you
If your producer does any of these things, he may be obligated to provide you advice. The producer may have a duty to describe your coverage options, explain their advantages and disadvantages, and instruct you on the limits you need.
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National Underwriter Property Casualty 360, "The Anatomy of a Producer Agreement," accessed February 11, 2020.
Anderson Kill, "Contracts With Insurance Brokers: Do’s and Don’ts," accessed February 11, 2020.
FindLaw, "Insurance Agent License Requirements by State," accessed February 12, 2020.
Brownson Norby, "Summary and Review of the Standard of Care and Duties for Insurance Agents - United States 50 State Review," page 2, accessed February 12, 2020.
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