Agent, broker definitions can be misleading.

With all due deference to Matthew Farmer, I must take exception to his "A Matter of Distinction" article that appeared in the December 2005 issue of Best's Review. His article simply restates the definitions of "agent" and "broker" found in most state insurance codes. This is a gross oversimplification.

The real test of who represents whom rests on what the agent/broker is doing. Even though California now issues a combination agent/broker license, its insurance code still has the same agent and broker definitions referred to in Mr. Farmer's article. At best, this is misleading, and, at worst, dangerous. In most states outside California, most licensed agents are also licensed brokers. This means that the "distinction" rests on what the agent/broker is doing.

The principle of shifting principals is pertinent. It is generally accepted that when the agent/broker is marketing an insurance placement, particularly with more than one insurer, the agent/broker is acting on behalf of the policyholder-applicant, thus is an agent of the applicant. Once the line of insurance has been placed, the agent/broker is generally considered to be acting on behalf of the insurer--even when the agreement between the agent/broker and the insurer is a brokerage agreement. Most of these after-placement activities involve premium collection, coverage changes initiated by the insurer, etc. An exception can occur when the agent/broker is requesting coverage modifications initiated by the policyholder.

Further complications arise when wholesalers are involved, such as surplus lines brokers, MGAs, program managers, etc., but this letter is limited to the retail agent/broker.

Donn P. McVeigh

Managing Director, Creative

Risk Concepts International

Oakland, Calif.