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What's in a name? Definition of agent, broker can create confusion and litigation.

To paraphrase Shakespeare: "To be an agent or not to be an agent, a broker, an insurance producer or a subagent; that is the question." Alternatively, how about being an agent or broker at the same time? Who you are, where you are located and how you document your files and operate your relationships with various insurance companies and intermediaries can often make the difference between being involved in litigation or not.

In the simplest terms, most insurance professionals can all agree that generally speaking, agents are representatives of the companies they are contracted with and brokers are representatives of the insured. This concept is absolutely understandable and logical, but nobody ever accused the insurance industry of being logical, so it is possible to be both at the same time. Unfortunately, in our complex and litigious industry, this simple definition no longer works.


Agents have contractual relationships with the companies they represent and brokers are actually insurance consultants who assist clients in meeting their insurance requirements. In situations where brokers are considered the representatives of the insured, they very often have a higher duty to advise and counsel their clients. Add to this the possibility of creation of an agency by the operation of law or in the event of an emergency.

The textbook "The Legal Environment of Insurance" by Karen K. Porter offers a good working definition of agency by the operation of law, as well as agency in an emergency. An agency by law may be created either by statute or "because of the necessity to achieve justice." An agency created in an emergency occurs "when there is little or no time to weigh alternate courses of action." If you understand this definition, you have more knowledge than I, because the text later says that the producer is not completely absolved unless he or she acted in a reasonable and prudent manner.

The creation of agency by the operation of law really depends on where your agency is domiciled. For example, if you are located in Texas or Minnesota, practically any insurance producer who is located in the chain of sale is considered a representative of the insurance company. If you are located in Louisiana, in most cases, the original distinction between agent and broker applies. Actually, there are probably as many distinctions from state to state as there are states. The following case is a prime example of a perfect storm created by the confusion caused by the variation in the definition of agent versus broker.

A client visits the office of an insurance producer and is seeking property coverage for a high hazard risk. The agency, which has contractual relationships with insurance carriers, realizes that this risk would not be suitable for any of its contracted carriers. Therefore, the producer submits the risk to the agent of a surplus lines insurer.

As part of the initial interview, the client provides detailed information to the producer regarding the location, building condition and loss history. The producer takes an application, assembles all of the information and calls the surplus lines agent. The agent and the producer discuss the risk in detail and the agent agrees to bind the risk. Subsequent to the agreement to bind the risk, the producer submits a written and signed application to the agent without any of the supporting underwriting information in his possession.

In turn, based on the acceptance of the risk, the producer issues a certificate of insurance as evidence that insurance is binding, and in due course a policy is issued. Several months later, a loss due to a covered peril occurs and is submitted to the insurance carrier for payment. I know what you are thinking--and that is I would not be writing this article if the losses were paid routinely. The loss was denied because the carrier said the application did not properly describe the location and if the application were accurate, the carrier would not have accepted the risk.

After the loss is denied, litigation follows. It turns out that the original producer, who admits to receiving all of the underwriting information, only provided the underwriting information "verbally" to the agent. It is easy to guess what happens next; the agent says, "We never got it."

In my opinion, the bottom line is that it is obvious that somebody is going to pay for this loss because certificates of insurance have been issued to the lien holders and other interested third parties, and a policy providing coverage has been issued to the insured. The question is, who is going to pay this loss--the producer, the agent, the insurer, or possibly all three? Therefore, the next step in the process is to attempt to determine if the various players in this transaction met their professional obligations.

The first thing to examine is the definition of the standard of care expected of agents and brokers. A good working definition from "The Legal Environment of Insurance" is, "Insurance producers must exercise reasonable care and skill in the performance of their duties. They must also deal with their clients in good faith and exercise reasonable judgment on their client's behalf." In addition to meeting the standards of care, producers also have a duty to fully disclose any information they have concerning the risk of the insured.

Is a verbal transmission by the producer or agent acceptable for crucial underwriting information? Assuming that the information was transmitted verbally when the agent received the application without the underwriting information, did it act in a proper manner by accepting the application without the underwriting information attached? Finally, if the agent actually received the information verbally, does the agent's knowledge impute back to the insurance carrier?

These are all good questions. I wish that I had equally good answers. The best solution I can offer is to think like an underwriter and not like a salesperson. In my 30 years as an insurance professional, I enjoyed very broad underwriting authority, very often greater authority than the front-line company underwriters. My suggestion is that if you are an agent, broker, subproducer, subagent or any other kind of insurance intermediary, always keep in mind that you are the person in the middle; when trouble arises, you'll be pressured from all sides in the controversy.

If you are considering whether or not to provide certain information to your underwriters, it is a sure sign that you should provide the information. Always keep in the back of your mind that there is no risk worth endangering your relationship's with the companies you represent or other sources of insurance coverage.

More on the Web:

* NRRA Grows Up Fast

* Bedbug Benefits?

* Train Novice Agents, Producers

Read these related articles at

Richard Mintzer, CLU, is managing partner of Richard Mintzer Assocs. LLc, a firm based in Boulder, Colo., that specializes in litigation support to the insurance industry. he has more than 40 years of industry experience, including as CEO of a regional general agency. For more information, contact him at
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Title Annotation:Avoiding E&O
Author:Mintzer, Richard
Publication:American Agent & Broker
Date:Oct 1, 2011
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