1.6 Insurance Agents and Producers Flashcards
Law of Agency
The law of agency defines the relationship between an insurance company, known as the principal, and a producer operating as its agent. The agent represents the principal and is appointed to transact insurance business on their behalf. This includes soliciting applications, collecting premiums, providing service to clients, and explaining the company’s insurance policies to prospective buyers.
Authority and Powers of Agency
A producer functioning as an agent for an insurer has an agency contract stating the parameters of their authority to represent the insurer. Because an agent is a representative of the principal, the insurer is responsible for all the actions of its agent, as long as that agent is acting within the scope of the authority granted to them in their agency contract with the insurer. If an agent’s action exceeds the authority of their contract, the agent may be personally liable for that action. Actions fall under one or more of the following types of authority: express, implied, and apparent.
Express Authority
Authority specifically granted in the agent’s contract. Limitations on the authority may also stated in the contract. For example, a contract may grant a producer the authority to bind certain types of risk, but may also state that binding authority is limited if certain conditions apply.
Implied Authority
Not all specific powers will be spelled out in the contract. Implied authority is authority not specifically stated in the contract, but reasonable and necessary in order for the producer to carry out their specifically stated duties. For example, if a contract grants the express authority to transact insurance business, this implies the authority to give quotes and collect premiums.
Apparent Authority
Apparent authority is when the principal’s conduct gives the general appearance that the authority exists. A producer’s use of preprinted forms, letterhead, business cards, and rate books bearing the insurer’s company logo all demonstrate apparent authority.
Producer’s Responsibilities to the Insurer
Producers have a fiduciary duty to the insurer in all respects. A fiduciary is a legal or ethical relationship of trust between two or more parties. Typically, a fiduciary prudently takes care of money for another person, for instance, especially when a producer handles premiums for insurance policies or applications. Producers must keep premiums in a trust account that is separate from other funds and forward the money to the insurer promptly; there must not be any commingling of funds. Producers must report any material facts that may affect underwriting and they are responsible for soliciting, negotiating, selling, and cancelling the insurance policies with the insurer. Producers have a duty to only recommend the purchase of policies that are suitable to their clients.
Producer’s Responsibilities to Insurance Applicant or Insured
Producers must forward premiums to the insurer in a timely manner. They must seek and gain knowledge of the applicant’s insurance needs in order to ensure they are recommending suitable products for them. Producers must review and evaluate the applicant’s current insurance coverage, limits, and risks, and they must serve the best interests of the applicant or insured, even though they represent the insurer. Producers must recommend coverage that best protects the insured from possible loss and NOT just the products that would be most profitable from the perspective of the producer.
Life and health producers do not issue contracts or binders for life or disability insurance and should not imply that coverage is in effect simply because a person submits an application and pays the first premium.
Broker
A licensed individual who negotiates insurance contracts with insurers on behalf of the applicant. A broker represents the applicant or insured’s interests, not the insurer, and does not have legal authority to bind the insurer. Broker licenses are not applicable in all states.
