Chapter 4 - The Insurance Buying Process Flashcards
BROKER DUTY
In an insurance transaction, brokers are the liaisons between two parties: the public (their client) and the insurer (also their client)
Fundamentally, brokers owe a duty to both their clients and the insurance companies they represent
we learned that a broker’s primary duty is to ensure clients receive appropriate insurance advice and coverage
Errors and Omissions Claims
we learned that a broker’s primary duty is to ensure clients receive appropriate insurance advice and coverage
inadequate coverage is the most common cause of errors and omissions (E&O) claims, accounting for more than 50% of all E&O claims.
These claims are the result of:
- Failure to provide proper coverages.
- Failure to advise clients of policy exclusions and terms that could affect coverage.
- Failure to place coverage, or placing it too late.
- Making mistakes in coverage.
- Not correctly advising as to the availability of coverage.
Other sources of E&O claims include:
- Misrepresentation and errors in the description of the risk being insured.
- Cancellation and renewal errors.
- Policy change errors.
- Processing delays.
- Binding authority violations (for example, exceeding binding authority).
Broker as First-Line Underwriter
Brokers are often referred to as “first line underwriters” as they are the ones who actually speak with the client. This means they are the first to have the opportunity to assess a client’s risk and determine whether it meets the insurer’s eligibility requirements.
Broker Contracts
A brokerage is required to provide choice to consumers, but it does not automatically represent any and all insurance companies. The right to represent an insurer must be confirmed via a contractual agreement known as a broker contract.
Authority: States that the brokerage office retains ownership of clients’ files and controls the placement of insurance for those clients. Also makes clear which party owns the expirations and who will continue to provide coverage for these policyholders if the broker contract is terminated by either party.
- Ownership of policyholders’ business (expirations): Provides eligibility rules and guidelines related to the types of risks a brokerage is authorized to write and bind coverage for, and provides the coverage limits for each policy type.
- Commissions: Lists the commission schedule for each class of insurance sold and the terms of any contingent profit commission as a reward for any brokerage whose portfolio of business is profitable for the insurer.
- Billing procedures: States how premiums are to be remitted to the insurer, depending on the premium payment method offered.
- Claims handling: Indicates whether the brokerage is authorized to adjust and settle claims or not. If so, it states the types of claims and dollar amount the brokerage can handle.
- Termination: Spells out the terms for cancellation of the broker agreement by either party along with the length of the notice period (ranging from 90 to 180 days).
Typical Steps of Insurance Process
- Needs Assessment
- Present Coverage Options
- Complete Application Form
- Apply for Insurance (Fraud Detection)
- Binding Coverage
- Premium Payment
- Broker as Fiduciary
Needs Assessment
a process whereby the broker asks sufficient questions to understand the nature of the object of insurance or risk, and the client’s objectives in buying insurance
Present Coverage Options
Once the broker has analyzed the coverage options and price points of several insurers, they will present options to the client, along with recommendations for the best coverage matched to the client’s needs and budget. The broker must be prepared to explain the pros and cons of each to the prospective insurance buyer.
Complete Application Form
The broker must be able to give plain language explanations regarding the information requested on an application and to answer any questions the client might have along the way.
When completing the application form, remember to let the client provide the answers. The broker’s role is to assist the client when completing the application. However, the broker must not answer questions for the client.
Also, never ask a client to sign a blank application form.
Apply for Insurance
Is the following statement true or false? When an applicant knowingly makes a false statement on an insurance application to get a lower premium, no one gets hurt.
False! This is insurance fraud and it hurts honest policyholders by driving up the cost of insurance for everyone.
When applying for insurance, the applicant has a legal duty to be forthright and honest. In fact, intentionally providing false information on an insurance application is a form of insurance fraud and can lead to denial of a claim, large fines, or even a criminal record.
Preventing Fraud on Applications
Brokers can, and should, play an important role in preventing insurance fraud. Most standard insurance application forms include a statement warning an applicant against knowingly making false or misleading statements on the application form and the consequences of doing so. We recommend that brokers read this statement aloud to each applicant before asking them to sign the application form
Binding Coverage
Binding coverage means the brokerage, as an authorized representative of the insurance company, has the authority to confirm insurance coverage is in force as soon as the client has agreed to purchase a policy
The client receives proof of insurance immediately, without waiting for the insurer to issue and mail policy documents.
Broker Binding Authority
As mentioned earlier in this chapter, a brokerage office receives its authority to bind coverage on behalf of an insurance company via contractual agreement with each insurer the brokerage represents. Binding authority lays out the types of risks a brokerage is authorized to bind, the eligibility rules, and coverage limits for each risk category.
If a broker exceeds the limits of an insurer’s binding authority and a loss occurs, the broker and the brokerage may find themselves facing an E&O claim
Premium Payment
There are several ways a client can pay the policy premium when purchasing a new policy from a brokerage, including:
- In full or through premium financing plans offered by an insurer (a down payment may be required).
- By cash, cheque, or, if offered by the brokerage firm, debit or credit card.
- Third-party premium financing plans.
Broker as Fiduciary
In turn, premiums collected from clients, net of brokerage commission, must be paid to the insurance company. This means the broker is acting as a fiduciary for the insurance company.
RENEWING POLICIES
Insurance policies are typically in force for a 12-month term. At expiration of the term, the policy can either be renewed for another 12 months or allowed to expire or lapse. A lapsed policy is one that has reached its expiry date and has not been renewed or extended.
The Insurance Bureau of Canada defines a renewal as a certificate that attests to the fact that an insurance policy, or contract of insurance, has been extended for another term. The full policy wording (the fine print) is not attached to the renewal certificate unless the insurance company has modified the policy coverage since the policy was first written.
Most policies for personal use automobiles, residential property, and small business packages are automatically renewed by the insurance company. Before renewing more complex commercial and farm policies, the insurance company underwriter will require updated information about the risk to ensure it still meets the insurer’s eligibility criteria.
Although many policies are automatically renewed, renewal time is an opportunity for the broker to re-assess the client’s risk. Are there any new drivers on the automobile policy? Has the insured acquired any high-value jewellery in the past year, or started a home-based business? Is there a change to a farm or business operation increasing the exposure to loss?
