The success in achieving your license and the elation of sharing you successfully passed is a powerful moment! The continued study of the industry, the classes you take, and the designations you earn to further grow the business and the agency.
The reality of what that really means, and the responsibility begins to set in. You realize the power of the pen, the weight of your words, and the value your signature carries.
Do you understand all your duties, authority, and standard of care for your state and the states you do business in?
The outline below covers and addresses the duties of an insurance agent from several sources. Contractual duties owed to your insurance carriers as an authorized representative, Contractual duties owed to the agent’s or broker’s customers based on agreements, Duties owed to third parties, The stand of care, and Best Practices.
The duties of an insurance agent come from several sources:
- State laws, state statutes, and regulations primarily imposed by the insurance and other laws of the agent’s or broker’s state, as well as reported cases in the state
- Contractual duties owed to insurance companies for whom the agent has agreed to be the legal or authorized representative under an agency or brokerage agreement
- Contractual duties owed to the agent’s or broker’s customers based on agreements to perform certain tasks as prescribed by law
- Duties owed to third parties that arise from an action or inaction on the part of the agency
Standard Of Care
An insurance agent’s standard of care is determined by law. In addition, some agents go beyond that based on Best Practices, as determined by studies & guides of other insurance agencies.
Insurance agents have sought to be treated on the same plane as accountants, attorneys, physicians, and bankers. Recognition of the insurance agent as a professional and with that, an expectation that the agent meets the standard of care or be faced with legal action from customers and insurance company partners.
The fact that every state requires that an agent be licensed to sell, negotiate, or transact insurance assumes they will have the knowledge to perform the activities necessary to provide this complex product to the insurance-buying public. It’s important to know your state’s Standard of Care and the states you do business.
State Laws
Agents under state law typically are covered in code sections and regulations concerning insurance, businesses, and Unfair Trade Practices laws, which are not geared specifically to one industry and are more general in nature. Unfair trade practices are often used when there is no other specific duty under insurance statutes or regulations. The basic intent of the laws is to prohibit unfair or deceptive practices in soliciting, selling, or servicing insurance. Examples of the acts to consider avoiding and that may give rise to claims against an agent based on state law (statues/regulations and case law) include:
- Defaming an insurance company in any way to injure its business reputation
- Discriminating in favor of individuals among insured persons of the same class as to rates, dividends, benefits, or other terms of insurance contracts
- Discrimination in property and casualty insurance based solely on geographic location
- Discrimination in insuring residential property based solely on the age of the property
- Falsifying records, books, or documents with the intent to injure or defraud anyone
- Making a rebate of all or part of the premiums payable on a policy or giving or receiving any valuable consideration as an inducement to purchase insurance
- Making misrepresentations to a policyholder to induce them to surrender, forfeit or allow any policy to lapse
- Making false advertisements or providing false information about any person in the business of insurance
- Making false or misleading statements as to dividends or other returns to be paid under a policy
- Misrepresenting the terms of an insurance policy
- Misrepresenting the financial condition of an insurance company
- Selling or offering any shares, securities, or bonds promising returns or profits as an inducement to buy insurance
- Using the title of a policy to misrepresent its true nature
Contractual Duties to Insurers
The difference between the terms “agent” and “broker” can be very significant and legal distinctions under the laws of some states.
An agent is the legal, authorized representative of the insurance company (principal) and, as such, owes a fiduciary duty to the insurer. The extent to which any additional duties have been created that flow from the agent to the insured is determined by state law and may vary by the circumstances. For example, under the laws of a state, the agent may owe a duty of reasonable care, skill, or good faith and fair dealing to the insured even without a fiduciary duty to the insured.
A broker is the legal representative of the insured (except for the collection of premiums) and owes a fiduciary duty to the insured. The extent to which any additional duties have been created that flow from the agent to the insured is determined by state law and may vary by the circumstances.
As an example, under the laws of a state, the agent may owe a duty of reasonable care and skill or good faith and fair dealing with the carrier even without a fiduciary duty to the carrier.
The duties owed by an insurance agency to an insurer include:
- Comply with the terms of the agency agreement
- Follow all underwriting guidelines provided to the agency
- Accurately disclose all known risks and material information
National Claims Statistic: Approximately 5% of E&O claims are generated from the insurer bringing claims against agents.
E&O claims brought by insurers against insurance agents based on alleged breaches of the duties and failure to follow bullet points listed below:
Failure to follow…
- act in the best interest of the insurer
- cancel coverage upon request
- disclose known material information
- exercise reasonable care in discharging its duties to the insurer
- revise coverage upon request
- underwriting guidelines provided to agents or exceeding authority provided to agents
The authority of an agent or broker to act on behalf of an insurer is listed in the agency or brokerage appointment agreement. Authority arises in the following ways:
Express Authority:
The appointment contract was entered between the insurance company and the agent.
This spell out the authority that is granted to the agent that express authority typically includes such things as:
- If the agent has binding authority – It’s important to know your binding authority limit!
- The time frames for transmitting documents to the insurer
- The manner in which premiums collected by the agent must be sent to the insurer
If these express authorities are exceeded by the agent, a cause of action may exist by the insurance company against the agent for a breach of contract.
Implied Authority:
Authority sometimes arises for an agent out of circumstances, even though it is not spelled out in a contract or agreement. Typically, implied authority is that which is required for an agent to exercise its express authority.
For example, an agency agreement may specify what type of coverage may be bound by an agency, but it may not say that the manner in which this is to be accomplished is to use an ACORD binder. The use of the binder would be implied the authority of the agent.
Apparent Authority:
Apparent authority arises when someone holds themselves out as being in a position to have authority for a particular course of action, even if that is not the case, and another person reasonably relies on that as a basis for their actions.
- Imagine that an independent agency advertises that it represents a certain insurance company. A prospect approaches the agency and requests coverage with that company, based on past positive experience with them.
- The agency gives the new policyholder a binder showing the insurance company they requested. Although the agency had no actual authority to bind that company, the consumer was reasonable in relying on the representation of the agent that it had the authority to issue the binder.
- If the insured is involved in an accident on the way home from the agent’s office that would be covered by the insurance he reasonably believed was properly bound, the agency would be exposed to liability to the carrier for the claim if the carrier is found liable, and to the insured, for the misrepresentation for damages not otherwise
- While it was most unusual for an insurance company to pursue an E&O action against one of its agents in the past, that is not true today.
- If an agent, through their negligence, causes a loss to the insurance company to which they are contracted, that company may pursue an action against the agent for reimbursement of any loss paid to the insured.
Contractual Duties to Customers:
Brokers may have a variety of contractual duties to their customers. Some contractual duties typically owed by a broker to its customers are to:
- Obtain coverage as requested by the customer
- Carry out instructions of the customer using reasonable care and skill
- Advise the customer in a timely manner if coverage desired by the customer cannot be placed
- Advise the customer in a timely manner if coverage desired by the customer cannot be renewed
One of the areas of potential liability for agents is the failure to identify an uninsurable exposure the customer has. This risk can be reduced or avoided by a thorough review of a customer’s exposures, such as:
- Physical inspections of property/risks to be insured (to the extent that the agent is trained about what to look for)
- Interviews with the customer’s key personnel
- Review of financial statements
- Have the customer provide you with the insurance requirements of contracts, agreements with vendors, suppliers, landlords, tenants, and others
- Review of the customer’s advertising materials, brochures, and website to gain a complete understanding of the insureds or prospect’s operations
- Flow charts created by the customer to understand the basic processes of the prospect/customer
- Surveys and checklists provided by an insurance or risk management organization
The number one cause of E&O claims is the allegation that there was a “failure to procure requested insurance.” This may arise in many ways, including if the broker fails to recognize exposures that may be unique to the type of business they are writing and insurance that they could and should have recognized. Litigation is being played out in the state courts stemming from potentially uncovered losses for which the insureds seek reimbursement. It is impossible to predict if these lawsuits will be successful, but even if they are not, the cost and time to defend them are expensive in actual dollars, and the time spent away from the business and its growth.
Duties Owed to Third Parties:
In the past, the courts would look to a legal concept called “privity” to determine if a party was legally obligated to another under contract. This meant that only the parties most
directly entering into a contract could be held responsible if the contract failed. Privity in insurance would have limited an agent’s or broker’s legal responsibility to a party other than the insured
or the insurance company. Like many other legal concepts, this one has been breached by the courts and therefore creates an additional E&O obligation on the part of insurance agents and brokers.
The duties owed to third parties by insurance agents and brokers include:
- Determining the other party’s interests to be protected (e.g., bank, mortgagee, loss payee, etc.)
- Advising other parties of failure to obtain coverage as requested
- Using an appropriate degree of skill and care in performing their duties to a third party
The vast majority of third-party suits against insurance agencies involve certificate holders, lien holders, or mortgagees. They typically involve the evidence of insurance provided by the agency. You should refer to the Certificates of Insurance Module for additional information.
Best practices are made up of three sections.
- Standards, Procedures, Workflow
The idea is that a project or process can be implemented and completed with fewer problems or complications with proper procedures, checks, and testing.
Best Practices:
- Understand the standard of care owed to your customer and how this may vary depending on the state in which you are doing Maintain standard agency procedures that address each type of customer transaction
- Audit to ensure standard agency procedures are adhered to by all agency staff, and that file comments are at the professional standard desired by your agency
- Thoroughly document customers files with requests for coverage, both offered and rejected
- Use surveys/coverage checklists to identify customer’s exposures and to document the acceptance or rejection of coverages
- Voice mail, email, fax, or other electronic communication should contain a disclaimer stating coverage cannot be bound without speaking with a licensed representative
- Implement a standard procedure to review policies and endorsements for accuracy, recognizing that non‐admitted policies may contain non‐standard coverage conditions or exclusions
- Deliver policy on a timely basis and document policy was delivered while also including language your customer to read their policy to ensure that it is in accord with the insurance ordered by the customer and to contact your agency if any changes are desired. (Note: State laws may require varying levels of delivery confirmation)
- Always utilize the agency management system for all communications/correspondence
- Send written correspondence to customers confirming declined coverages
- Include disclaimers on all coverage summaries and policy delivery correspondence. Example language: PLEASE READ YOUR POLICY CAREFULLY: This is a proposal (or summary) provided for illustration purposes only; it is not a legal It is provided to facilitate your understanding of your insurance program. Please refer to the actual policies for specific terms, coverage, conditions, limitations, and exclusions that will govern the event of a loss. Specimen copies of all policies are available for review prior to the binding of coverage. In assisting you with your insurance needs, we have been dependent upon information provided to us by you. If there are other areas that need to be evaluated prior to binding coverage, please bring them to our attention. Should any of your business operations or exposures to loss change after the coverage is bound, it is the customer’s responsibility to let us know promptly so proper coverage(s) can be discussed.
- Avoid “renew as is” ‐ Discuss with customers what has changed since last year and offer increased limits or additional coverages
- Stay within your comfort zone and area of expertise
- Be aware of how policies you place integrate and overlap, especially regarding umbrella and excess policies
- Instill a “claims prevention” mentality among agency staff
- Submit ALL claims to the carrier in a timely manner and do not make a coverage determination on behalf of the carrier
- Have the customer sign, date, and initial applications, where required
- Require continuing education to staff beyond just what is required to maintain licenses
- Have service standards and respond to all customer inquiries in a timely fashion
- Do not alter standard Certificates of Insurance forms or indicate coverage or limits that do not exist on the actual insurance policy
- Require written confirmation from the insured before making any changes to an existing policy, or if accepted via telephone, send written confirmation to the customer verifying change
Some best practices are defined by your insurance carriers. Normally insurance carriers specify in your contract when and how you bind coverage with them. Other best practices, such as your renewal process, may be defined by the marketplace. Suppose your competition sees your clients at 120 days to gather marketing information. Doesn’t it make sense that you should be working with your client before that date to protect your client relationship and avoid needing them to even speak to your competition? Your E&O insurance carrier often has information that can guide you in defining and putting best practices in place. Ultimately the responsibility of each agency is to define, implement and audit the best practices that fit their operation.
It is acknowledging and reviewing the Agent’s Duties, Authorities, and Standard of Care through all staff training and incorporating these with your agency’s best practices and procedures reviews.
