A matter of distinction: do you know the differences between agents and brokers?

The terms agent and broker often are used interchangeably, even though they are different. Even some courts use the words interchangeably and don't seem to appreciate the distinction.

An agent transacts insurance business on behalf of, and for the benefit of, the insurance company. The broker is the "agent" for the insured and transacts insurance business for the benefit of the insured. Both are, in effect, "agents" for somebody else. The term "broker" is used to signify the insurance salesman is not the "agent" of the insurer, but the insured.

Both relationships are fiduciary in nature. This means the agent owes to the principal a high degree of loyalty and must also be faithful. To work, it requires a high degree of trust to exist. All fiduciary relationships, including that of principal and agent, are held sacred and are highly protected by the law.

Agent's Duties

The agent's duties to the insurer depend on the contractual relationship between the parties. For example, an agent can be an employee of the insurer or can be an independent contractor who maintains and pays for his or her own office but sells insurance on behalf of the insurer. Whether the agent is an employee or an independent contractor defines the amount of control the insurer can exert over the agent's activities.

As another example, the agent could be contracted to sell insurance exclusively for the insurer. He, or she, may be given some leeway as to competing or noncompeting lines and products of insurance to sell. This, too, will impact the relationship between the agent and the insurer. It may even create an agent who wears multiple hats--who transacts insurance as an agent of the insurer for some products and lines yet acts for the agent of another with different products and lines.

There are numerous duties that exist within the agent and insurer relationship. The agent must serve the best interests of the insurer. This may present difficulty to the agent who may desire to serve the best interests of the insured to the insurer's detriment. The agent cannot prefer the insured's interests over the insurer. That is not to say that the insurer cares little of its policyholders but there will be times when the positions of the insurer and insured clash over particular issues. The insurer no doubt will want the agent to carry out and maintain excellent customer service for the insurer's policyholders and remain professional in all circumstances including those involving policyholder disputes.

The agency relationship between agent and insurer requires the agent to maintain and keep information confidential. An agent will be expected to keep confidential matters private so its principal insurance company tan maintain its competitive edge.

One of the most important responsibilities is the agent's duty of loyalty. This duty encompasses many things. The agent is precluded from competing with the insurer in matters that are within the agency relationship. If an agent agrees to sell a particular type of fire insurance exclusively for the insurance company and that agent later sells a similar type of fire policy for another insurer, a violation of the duty of loyalty will have occurred. The agent also is precluded from using the agency relationship for his own self gain to the detriment of the insurer. This does not prohibit the agent from attempting to sell as many insurance policies as possible for the insurer as long as the agent is acting on behalf of the insurance company. The agent also has the obligation to account for policy premiums and other moneys collected or paid on behalf of the insurer.

Duties also are owed to the agent by the principal insurance company. The insurer must act in good faith in regards to relations with the agent. This duty may be further defined by the agency contract between the insurance company and the agent. The contract between the parties also may create certain duties to inform the agent on particular matters. It also is typically the obligation of the principal insurance company to keep accounts of what is owed to the agent for his or her services. The principal insurance company also may have an obligation to defend and indemnify the agent in matters arising out of the course and scope of the agency relationship.

Bear in mind also that, depending on the circumstances, an agent may owe certain duties to the insured despite the agent's relationship with the insurer. The breadth and scope of the duties will depend on the circumstances of the case including what, if any, relationship has been built between the agent and the insured.

The Broker

The broker relationship has many of the same duties as noted above. The broker typically has the overriding duty to get the "best insurance deal" for the insured that fills the insured's insurance needs. In the broker relationship, the broker may even have a limited agency relationship with the insurer that consists of the duties of promptly remitting to the insurer policy information and premiums.

Another important distinction between an agent and a broker is who owns the book of business generated by the insurance salesperson. Obviously, the insurance tendencies of a group of insurers, together with expiration dates, are the lifeblood of the insurance industry. It is not uncommon to have disputes over the book of business. Typically, the agent for the insurance company does not own the book of business while the broker does. This is another issue that may be modified or impacted by contract.

Key Points

* An agent transacts insurance business on behalf of, and for the benefit of, the insurance company.

* A broker's loyalty lies with the insured.

Contributor Matthew Fariner is an associate attorney with Bake, Manock & Jensen.