According to “CITE,” West’s Encyclopedia of American Law, edition 2, copyright 2008, The Gale Group, Inc. All rights reserved, the definition of an agent is “a person who represents another through employment, by contract, or apparent authority.” Specifically then, in the insurance industry this would be a person employed by an insurance company to represent, sell, and service products authorized by that company.
This broad definition does not distinguish between the various types of insurance agents, but it does point out the important point that the agent can bind the principal by contract and/or create liability if he/she causes injury while in the scope of the agency granted to the agent. It is important to recognize the authority to act may be expressed or implied. The buying public looks upon the agent’s actions and words as binding upon the company, so whether it was expressed or implied conduct means little in the purchasing process. The distinction is critically important to the principal (the company being represented by the agent) for the following reason. If the agent knowingly and willingly represents coverages beyond the scope of the insurance policy and a claim is submitted, the company would have the right to deny the claim based upon the premise that the agent misrepresented the company’s policy. The agent would then be personally responsible to the claimant and would more than likely lose the right to represent that company any longer. He would also very easily lose his license from the state and, depending upon the severity of the misrepresentation, end up doing some jail time. It goes without saying the commitment to the agent/principal relationship is one of the bedrocks of our economic well being.
Having said the above, legitimate mistakes can be made; and the principal, seeing that such may be the case in an “uncovered” claim, would probably stand behind the agent and proceed with handling the claim. Good public relations plays a major role in the client-company relationship so the legitimate mistake on the part of the agent would be dealt with in such a way that client-company relationship would stay intact.
Here are the generally recognized types of agent representing insurance company marketing to buying public.
- Direct Writer, captive agent or exclusive agent: an agent who represents only one company or a group of companies under similar management, i.e. Idaho Farm Bureau Mutual Insurance Company, Western Community, Farm Bureau Brokerage, State Farm Mutual Insurance Company, State Farm Fire Company, Farmers Mutual Insurance Company, or Mid Century Insurance, Farmers Allstate. These agents are normally restricted from submitting business to any other company unless it is first rejected by the agent’s company.
- Independent agent: an agent who works as an independent contractor on a commission basis for insurers they have contracted with to sell or provide service on insurance policies. In my area of Idaho, one independent agency has contracted with Safeco, Oregon Mutual, Bear River Mutual, Progressive, GEICO, Travelers, and several others. Such an agent can be extremely competitive premium-wise because of the many companies they represent, but they have been vulnerable to having their contracts terminated if sufficient premium is not being generated or if negative claim loss ratios occur with the companies they represent. This requires the agent to stay abreast of how much premium is being generated for each designated company and the losses for each company. In order to protect his/her income stream, care must be taken to spread out the placement of insurance in the event of these contract termination possibilities. Generally insurance companies pay a higher commission on first year business. The independent agent must be careful and have the ethical courage not to “churn” existing business by replacing existing clients’ coverage with another company every year.
- InsuranceBroker: a licensed broker who sells, solicits, or negotiates insurance for compensation. This compensation is determined by agreement between the broker and the insurance provider. The amount is not required to be disclosed to the customer; but if the regulation passed in New York in 2011 which requires disclosure catches on, this could become a requirement somewhere in the sales cycle. Most states regulate insurance brokers and require them to obtain an insurance broker license. It used to be that states would issue a separate license for agents or brokers, but now most states simply issue a single producer license whether the person is acting on behalf of the insured or insurer. Also, the term “insurance producer” is now used in reference to both insurance agents or brokers due to there not being an absolute separation in the public’s eye of the differences between them.
It should be made clear that an insurance agent’s primary alliance is with the insurance carrier and not with the insurance buyer; whereas, an insurance broker represents the insured, and some even represent the insured in the event of claim negotiations.
An insurance broker could be a very important member of a company’s financial team, particularly with smaller companies who don’t have the financial wherewithal to have someone on the payroll to handle insurance needs. The broker can do the shopping and negotiate for coverages required and then receive compensation, not from the insured but from the company providing coverages. It could be said the broker is the best paid non employee you could have on your sales team.
In light of so many things changing in the workforce–health care, sexual harassment suits, product liabilities, civil unrest, overseas insurance requirements, interpretation of leases, etc.–going to a brokerage firm may turn out to be a very sound financial decision.
There may be a trend to purchasing insurance without having ever discussed insurance needs with an agent, but there will always be a need in the marketplace for competent agents to look after the needs of the buying public. It is one thing to get a 15-minute rate quote for car insurance and quite another to get a professional liability quote to provide product liability or professional E&O. No wonder insurance agents and brokers are held in high esteem for the work they do.