What are the Obligations of Your Agent or Broker?

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Insurance agents and brokers are overseen by regulators to ensure they act in the interest of insurance buyers. They are required to obtain a license and must fulfill certain duties to policyholders. Agents and brokers are barred by law from committing fraudulent or dishonest acts.

Subject to State Regulation

Like insurance companies, insurance agents and brokers are regulated by the states. They are subject to the laws enacted by state legislatures and enforced by state insurance departments.

Insurance regulatory departments often refer to insurance agents and brokers as producers. The name derives from the fact that agents and brokers produce (generate) income from commissions they earn from the sale of policies. At an insurance agency or brokerage, the word producer often means an individual who performs mostly sales work rather than servicing clients. For the purposes of this article, producer simply means an agent or a broker.

Producer Licensing

All states require insurance agents and brokers to obtain a license in order to sell insurance. A state may offer a dozen or more types of licenses. Examples are a Property and Casualty license, and a Life, Accident and Health license. The type of license a producer needs depends on the kind of insurance he and she intends to sell. For example, a producer who wants to sell life insurance may obtain a Life Only license. If the producer wants to sell accident and health insurance as well as life insurance, he or she will likely need a Life, Accident and Health license.

The named and types of licenses vary from state to state.

In most states, a producer must complete a specified number of hours of prelicensing education in order to obtain a license. Typically, the producer completes a prelicensing course approved by the state insurance department. He or she then takes a licensing exam.

If the applicant passes the exam, he or she is awarded the applicable license.

Some producers obtain multiple licenses. For instance, a producer who wants to sell both life and property/casualty insurance will likely need a life insurance license and a property/casualty insurance license.

An insurance license is typically valid for two years. Generally, an insurance license can be renewed only if the producer fulfills the continuing education requirements specified by the state insurance department. An agent may be required to complete say, 40 hours of continuing education during the two-year period the license is in effect. The producer may have several options for fulfilling these requirements. For instance, he or she may take classes, attend seminars, or complete online courses.

Before enlisting the services of an agent or broker, be sure he or she is a licensed producer. You can verify the producer's status by contacting your state insurance department. Many insurance department websites provide a "look up" tool that can be used to verify that a producer's license is active.

Duties and Responsibilities

Technically, an insurance agent works on behalf of one or more insurers, while a broker works on behalf of the insurance buyer.

Nevertheless, agents and brokers perform many of the same duties.

A producer has a professional obligation to help you (the customer) obtain appropriate insurance coverage. He or she should explain what coverages are available and make recommendations. You must decide what coverages you want and communicate your wishes to the producer. Your agent or broker is obligated to obtain the insurance coverages you have elected. If the coverages you actually receive differ from those you requested, the producer must explain the discrepancies.

Your producer may be liable for negligence if he or she fails to inform you that the coverage you received is not what you requested. For example, suppose that you purchase a commercial property policy through your insurance agent, Jack Jones. You tell Jack that you want to include building ordinance coverage in your policy.

You emphasize that this coverage is critical to your business, and that it must be included.

When Jack delivers your policy, he assures you that it includes all the coverages you requested. Six months later, a building you own is burned in a fire. You file a property claim with your insurer. Unfortunately, the amount you receive for the claim is substantially less than you expected. You discover that in spite of Jack's promise, your policy does not include building ordinance coverage. If you sue Jack for negligence, he may be liable to you for the amount you would have collected under building ordinance coverage had the coverage been included.

Your producer is not obligated to anticipate all risks that might arise from your business and to advise you how to cover them. Most agents and brokers are not professional risk managers. They rely on the information you provide about your business to make coverage recommendations. 

The producer has a duty to exercise reasonable care to place your insurance with a financially sound insurer. If the producer learns that your insurer has become financially impaired, he or she has a duty to warn you. Likewise, if the producer learns that your policy is about to be cancelled, he or she has an obligation to notify you.

Broker and Agent Fraud

A majority of insurance agents and brokers are honest, hard-working professionals. However, there are always a few "bad apples". If you think your producer is acting dishonestly, you should report him or her to your insurance department. Here are some signs that the producer may have committed insurance fraud:

  • The producer has collected a premium but no policy has appeared. The producer may claim that he or she is retaining your policy for "safekeeping."
  • Your policy has been cancelled mid-term but you have not received a return premium, even though the insurer confirms it has issued a check.
  • The producer encourages you to submit fake or inaccurate information in the insurance application.
  • The producer sells you a policy from a seemingly nonexistent insurer. Your Internet search of the insurer yields no information.
  • The agent adds coverage to your policy that you didn't request and don't need. The sole purpose of this action is to drive up the premium, generating more commission for the agent.
  • The producer has pushed you to put money into an "investment" that he or she says is too good to pass up.