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While understanding who can purchase insurance is crucial, equally important is understanding how insurance is sold. This brings us to the law of agency, which governs the relationship between insurance companies and the professionals who represent them. The insurance industry relies on a complex network of relationships between companies, agents, brokers, and clients.
As noted earlier, an insurance agent is authorized to sell, solicit, negotiate, and effect contracts of insurance on behalf of an insurer through a contractual arrangement. An agent's role involves the following duties:
Insurers grant agents the authority to undertake these functions in their contract of agency with the company. This agreement may also be referred to as an agent appointment or agency agreement. This contract clearly defines the scope of an agent's authority to act for an insurer. When acting within the scope of the authority granted, an agent is considered to be the insurance company. The relationship between an agent and the company being represented is governed by agency law.
By legal definition, an agent is a person or entity that acts on behalf of another person (i.e., the principal). For insurance purposes, the insurer is referred to as the principal. The agent represents the principal in dealings with third parties that concern contractual arrangements. Authorized agents can create binding contracts for the principal. These contracts include both rights and responsibilities. From this description, the four essential principles of agency law can be identified:
The scope of agent authority is another important concept of agency law. "Authority" is what an insurer grants a licensee for this person to transact insurance on its behalf. Technically, only authorized actions can bind a principal. In reality, an agent's authority can be quite broad.
There are three types of agent authority: express, implied, and apparent. When agents act with authority, the company becomes legally responsible for their actions. Under the law, the agent and the company are treated as identical when the agent acts within the scope of their authority. This is why it's important for the insurance company to clearly define the authority it grants its agents, because the company might have to pay for the agent's mistakes.
Express authority is the authority a principal deliberately gives to its agent. This authority is granted by means of the agent's contract, which is the principal's appointment of the agent to act on its behalf. Express authority refers to those activities that are expressly stated in writing under the terms of the agent's contract. For example, an agent has the express authority to solicit applications for insurance on behalf of the company, whether through face-to-face meetings, video consultations, or by helping clients navigate the company's digital application platforms.
Implied authority is the unwritten authority not expressly granted in writing; instead, it's the authority that an agent is assumed to have to transact the principal's business. Implied authority is incidental to express authority because not every single detail of an agent's authority can be spelled out in the agent's contract. For example, an agent's contract may not explicitly state that they can print business cards containing the company's name, but the authority to do so is implied.
Apparent authority is the appearance of authority based on the actions, words, or deeds of the principal. Consumers assume the agent has certain types of authority based on the appearances or circumstances that the principal has created – regardless of whether such authority exists. For example, if an insurer provides an individual with access to its agent portal, digital quoting tools, and an official company email address, the insurer has created the impression that an agency relationship exists between itself and the individual. The law will not allow the company to later deny that such a relationship existed, even if no signed agency agreement is in force. Apparent authority relies on a company's actions; if the agent stole the items described in the above example, it would constitute fraud, since the company neither provided the material nor failed to reclaim it.
Licensing exams frequently present scenarios asking you to identify which type of authority is being demonstrated. Express = specifically written in the contract. Implied = necessary to do the job. Apparent = would customers assume that an agent could do something? Most agent mistakes that lead to company liability fall under apparent authority!
| Type | Definition | Source | Examples | Limitations |
|---|---|---|---|---|
| Express | Specifically stated powers | Agent's contract | Selling policies, collecting premiums, binding coverage | Limited to contract terms |
| Implied | Powers necessary to do job | Common business practice | Business cards, office supplies, basic communications | Must relate to express authority |
| Apparent | Authority the public assumes exists | Company actions/behavior | Company email use, logo on materials, office signage | Based on reasonable appearance |
As described previously, insurance producers may be agents or brokers. Although an agent has an agent's contract, and a broker has a broker's contract, the same Law of Agency governs both parties. The most significant difference between the two types of contracts is that, in a sales transaction, agents represent the insurer, while brokers represent the buyer (or applicant). A broker solicits and accepts insurance applications and then places the coverage with an insurer. A broker cannot bind coverage. However, an agent's contract and appointment with one or more insurance companies grants that agent the authority to bind an insurer to an insurance contract. A broker must work with an agent or company representative who can bind an insurer.
An insurance producer who's working as an agent has the authority to seek out applicants, present product solutions to meet insurance needs, complete applications, and bind coverage. Some states also allow for licensed solicitors. Solicitors have the authority to seek out insurance applicants for a company, but don't have any authority to bind coverage on behalf of a company. Solicitors arrange for prospective clients to meet with agents who can sell and bind insurance coverage that meets the clients' needs.
A fiduciary is someone who must put their client's interests first. Insurance agents are fiduciaries because they handle money and make decisions that affect their clients' financial security. A fiduciary is a person who holds a position of financial trust and confidence. Agents act in a fiduciary capacity when they accept premiums on behalf of the insurer or offer advice that affects a person's financial security.
| Aspect | Agent | Broker | Solicitor |
|---|---|---|---|
| Represents | Insurer | Client/insured | Agent/agency |
| Can bind coverage? | Yes | No | No |
| Authority type | Agent's contract | Broker's contract | Licensed solicitor under agent supervision, no independent authority |
| Appointments required? | Yes | No | Yes (with an agent or agency) |
| Fiduciary duty | To insurer and client | To insured | To appointing agent/agency |
| Typical activities | Sells policies, binds coverage, collects premiums | Shops multiple carriers, advises clients, places coverage through agents | Finds prospects, sets appointments, cannot sell directly |