Insurer and Agent
Agreement between the insurer and the agent setting out the details of the appointment of the agent, duties, documentation, remuneration etc.
Agreement between Insurer and Agent
This is a written contract stipulating the arrangement between an
insurance agency and the insurer it represents. Important details such
as ownership of renewals, commission percentages, and duties and
responsibilities of each party are usually spelled out in this agreement.
Insurance agents have contractual agreements (known as
Appointments) with insurers that set up the guidelines for the policies
they can offer and the terms of their remuneration. A ‘captive agent’ is
an agent dedicated to one insurance company’s product while an
'independent agent'can align themselves with multiple insurers. The
insurance agent therefore aims to attract insurance business for their
principal(s).
Insurance is sold primarily by agents. The underlying contract, therefore,
is affected significantly by the legal authority of the agent, which in turn
is determined by well-established general legal rules regarding agency.
The law of agency basically deals with the legal consequences of people
acting on behalf of other people or organizations.
Agency involves three parties: the principal, the agent, and a third party.
The principal(insurer) creates an agency relationship with a second party
by authorizing him or her to make contracts with third parties
(policyholders) on the principal’s behalf. The second party to this
relationship is known as the agent, who is authorized to make contracts
with a third party. It is important to note the difference between an agent
who represents the insurer and a broker who represents the insured.
However, in certain instances brokers are not allowed to operate unless
they also obtain an agency appointment with an insurer.
The source of the agent’s authority is the principal. Such authority may
be either expressed or implied. When an agent is appointed, the
principal is required to expressly indicate the extent of the agent’s
authority in the agreement. The agent also has, by implication, whatever
authority is needed to fulfil the purposes of the agency.
By entering into the relationship, the principal implies that the agent has
the authority to fulfil the principal’s responsibilities, implying apparent
authority. From the public’s point of view, the agent’s authority is
whatever it appears to be.
If the principal treats a second party as if the person were an agent, then
an agency is created. When entering to such agreements the parties
should be aware that agency law and the doctrines of waiver and
estoppel have serious implications in the insurance business.
Binding Authority
The law of agency is significant to insurance in large part because the
only direct interaction most buyers of insurance have with the insurance
company is through an agent or a broker, also called a producer.
Laws regarding the authority and responsibility of an agent, therefore,
affect the contractual relationship.
One of the most important agency characteristics is binding authority. In
many situations, an agent is able to exercise binding authority, which
secures (binds) coverage for an insured without any additional input
from the insurer. The agreement that exists before a contract is issued is
called a binder. This arrangement, described in the offer and acceptance
section, is common in the property/casualty insurance areas. If you call
an agent in the middle of the night to obtain insurance for your new
motor vehicle, you are covered as of the time of your conversation with
the agent.
In life and health insurance, an agent’s ability to secure coverage is
generally more limited. Rather than issuing a general binder of
coverage, some life insurance agents may be permitted to issue only a
conditional binder. A conditional binder implies that coverage exists only
if the underwriter ultimately accepts (or would have accepted) the
application for insurance. Thus, if the applicant dies prior to the final
policy issuance, payment is made if the applicant would have been
acceptable to the insurer as an insured. The general binder, in contrast,
provides coverage immediately, even if the applicant is later found to be
an unacceptable policyholder and coverage is cancelled at that point.
Estoppel
Estoppel occurs when the insurer or its agent has led the insured into
believing that coverage exists and, as a consequence, the insurer
cannot later claim that no coverage existed. For example, when an
insured specifically requests a certain kind of coverage when applying
for insurance and is not told it is not available, that coverage likely exists,
even if the policy wording states otherwise, because the agent implied
such coverage at the time of sale, and the insurer is estopped from
denying it.
Agency by Estoppel
An agency relationship may be created by estoppel when the conduct of
the principal implies that an agency exists. In such a case, the principal
will be estopped from denying the existence of the agency (recall the
binding authority of some agents). This situation may arise when the
company suspends an agent, but the agent retains possession of blank
policies.
People who are not agents of a company do not have blank policies in
their possession. By leaving them with the former agent, the company is
acting as if he or she is a current agent. If the former agent issues those
policies, the company is estopped from denying the existence of an
agency relationship and will be bound by the policy.
If an agent who has been suspended sends business to the company
that is accepted, the agency relationship will be ratified by such action
and the company will be estopped from denying the contract’s existence.
The company has the right to refuse such business when it is presented,
but once the business is accepted, the company waives the right to deny
coverage on the basis of denial of acceptance.
General Agent Duties to Insurers
Because of the law of agency, there are various general obligations an
insurance agent may owe to an insurance carrier, which differ,
depending upon the carrier,
the following are general duties to consider:
• fiduciary duty;
• loyalty;
• accounting – collection of premium;
• disclosure of information.
Fiduciary Duty
Where a high level of trust arises in connection with the insurance agent-
principal relationship, it can be considered to be a fiduciary one.
Often fiduciary relationships involve the handling of money.
Loyalty
The agent has the duty of loyalty to its principal. The duty of loyalty
embraces several subsidiary obligations, including :
• refraining from competing with the principal;
• taking action on behalf of or otherwise assisting the
principals competitors;
• not acquiring a material benefit from a third party in connection
with actions taken through the agents use of the agents position;
• not using or communicating confidential information of the principal
for the agents own purposes or those of a third party.
Accounting – Collection of Premium
In general, the premiums due on a new insurance transaction are
collected by the producer and checks are made out by the customer to
the agency, and then owed to the carrier (less any commission due).
These net premiums may be held for a period of time before
the agency turns them over to the carrier in accordance with the terms of
the agency agreement.
Disclosure of Information
Since the agent is representing the principal, and since the agent’s
knowledge is imputed to the principal, it is reasonable for the principal to
expect that their agent will provide them with any material information of
which the agent is aware .
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