Applying Agency Law - Chapter 10
Producers' Duty To Perform Insurance
The duty to procure insurance involves care skill effort and diligence on the insurance producer's part. Producers cannot guarantee coverage for particular loss exposures at the price or limits desired but they must make a good faith effort to procure the desired insurance or promptly provide notice if that's not possible.
Brokers
While an insurance agent represents the insurer the insurance broker usually represents the insurance customer. An insurance broker is independent does not work for a particular insurer and typically assists large insureds in obtaining coverage from competing insurers. Some insurance brokers have expanded their roles beyond finding available insurance coverage and coordinating the placement of their clients' insurance business. Some brokers have become risk consultants who advise clients on how to handle their loss exposures. This includes using both alternative risk control or claims services or assist insurers in obtaining reinsurance coverage
soliciting agent
An insurance producer whose authority is limited by contract with an insurer to soliciting applications for insurance and performing other acts directly incident to those activities.
Examples of Producer's Authority
- Pierre has an agency contract with InsurInc that calls him a general agent and specifically grants him several powers, including the power to renew policies. One of Pierre's insurance customer's policies comes up for renewal. Without consulting InsuLinc, Pierre tells the customer that the policy is renewed and collects the renewal premium. Pierre is acting pursuant to express authority and his action binds InsurInc whether or not InsurInc wanted to renew the policy. - Olga has an agency contract with InsurInc that does not attach any description to the relationship created. The contract gives Olga several powers including powers to bind the insurer to new business collect premiums issue policies and adjust small claims. Olga does not have the power to renew policies. Her office displays the company logo prominently in several places and all of InsurInc's forms that Olga uses have her name of them and label her as InsurInc's agent. Olga places a substantial amount of insurance with InsurInc. One day Olga decides to renew one of her best customer's insurance on her own without consulting InsurInc and collects the appropriate renewal premium. S covered loss occurs the next day. Despite Olga's lack of actual authority to renew the policy she has bound InsurInc to cover the loss. Olga acted with apparent authority. Under these circumstances Olga's customer reasonably believed that she has the authority to renew the policy on InsuInc's behalf. InsurInc has acted as though Olga is its general agent and is estopped from denying this relationship.
Categories of Insurance Agents
General Agent: Broad Powers within underwriting guidelines. - Solicits applications for insurance - Receives premiums - Issues and renews policies - Appoints subagents - Adjusts losses in some cases Special Agents: Authority restricted by express agreement with insurer - Induces third parties to apply for insurance - Forwards applications to the insurer - Delivers policies to the insureds on receipt of premium - Possible additional duties such as inspecting property quoting rates collecting premium payments and assisting with changes in coverage. Soliciting agent: Narrow authority derived directly from the agency contract - Solicits applications for insurance - forwards applications to the insurer
Agency Termination
John is an independent insurance agent. One of the insurers with which John has had an agency contract for ten years. MutualCO decides to terminate its arrangement with him and instructs him to stop writing business. John still has MutualCo application forms manuals and rating information in his office and displays a MutualCo plaque on the wall. MutualCo remans listed in the local telephone directory as one of the insurers with which John is associated. One month after John's agency termination with MutaulCo a new customer Alex consults with John about his personal insurance needs. John issues a thirty day binder to Alex through MutualCo covering all of Alex's cars then forwards Alex's application for one year car insurance policy to MutualCo. John's actions in issuing the binder bind MutualCo to coverage for Alex. John's actual authority has ended but the various indications that John is still a MutualCo agent(manuals office plaque application forms telephone listing) have created apparent authority on John's part. A second example assumes the same facts except that at the time John's association with MutualCo terminates MutualCo representatives repossess from John all application forms rating materials manuals and other material displaying the MutualCo company logo. At the time Alex visits John John possesses no indication that he ever represented MutualCo. John's only connection to MutualCo is his unsupported assertions that he represents the insurer. Because John has never represented Alex as a MutualCo agent, John's attempt to bind coverage probably would not bind MutualCo. John of course has no actual authority because MutualCo expressly terminated it. John also probably has no apparent authority because he possesses nothing that would support a reasonable conclusion that he represents MutualCo. Unless other facts emerge that provide Alex with a reasonable basis to conclude that John represents MutualCo John's issuance of the binder is not authorized and thus is not binding on MutualCo.
Example of Imputed Knowledge
Owen the insurer's authorized agent assisted a customer Angelica in arranging automobile insurance for a car owned by Angelica's son. Owen told Angelica that Angelica's policy would provide the coverage. Later a loss occurs. The insurer denies coverage based on the policy language conferring coverage only for a named insured's vehicles and not for the insured's son's vehicle. The insurer cannot deny coverage because it is held to know what its agent knew at the time the policy was issued.
Producer's duties and liability to third parties and insurers
Producers must understand their obligations and liabilities to people in their various business relationships. Under general contract law the parties to an agreement owe duties and obligations to each other but not to third parties who might come in contact with either of them. The producer insurance customer relationship is one of principal and agent. Accordingly third parties generally have no rights under this relationship but producers must be aware of the few exceptions allowed by certain courts. In many insurance transactions a producer must represent both the insurer and the customer. Producers must therefore deal with insurers with care skill diligence and loyalty. The producer owes four duties to the insurer: - Duty to disclose risks - Duty to follow instructions - Duties of loyalty and accounting - Duty to transmit information properly
Agents
The term Insurance agent or agent refers to an intermediary who arranges contracts of insurance between a specific insurer with which the agent has an ongoing relationship and prospective insureds. The prospective insured is the customer. Insurance agents can fall into three categories based on the degree of discretion they have in carrying out their functions: general agent special; agent and soliciting agent.
Producers' Authority
When does a producer have the authority to issue policies or take other actions that are binding on an insurer? It's easy to understand when a producer has actual authority expressed in a written contract but risk management professionals also need to grasp the implications of a producer's apparent authority. There are two types of producer authority: - Actual authority - apparent authority The insurer can bind itself to the unauthorized acts of a producer through subsequent conduct that ratifies the producer's acts. If an insurer ratifies a producer's unauthorized actions with full knowledge of the acts, then the insurer accepts the benefits or consequences of those actions. The insurer must evaluate whether it should enter into a formal relationship through an agency contract or deny the relationship and refuse to ratify the producer's submissions.
general agent
an agent that is given the authority to perform a variety of tasks
special agent
A person or an entity that is employed to act for the principal in a specific transaction or only for a particular purpose or class of work.
Producers Duty to Follow Instructions
A producer must strictly follow the customer's instructions and is liable to the customer for any damages that result from not doing so. Therefore a producer who fails to add an available coverage requested by an insured is liable for a subsequent loss that the policy would have covered had the producer followed instructions. The insurance customer however also has duties. The customer has the duty to provide clear instructions to the producer. If instructions are ambiguous the producer is justified in acting in good faith on any reasonable interpretation of the instructions.
Extent of Producers' Authority
A producer's authority is defined by whether the producer represents an insurer or an insurance customer and is limited to the authority conferred by the insurer or the customer. Once an agency relationship is established between a producer and an insurer the producer can act on the insurer's behalf. Why does the extent of a producer's authority matter? First the producer's actions must be consistent with authority granted within the agency relationship. This is necessary because an insurer like any other principal is liable for the acts performed or contracts made by one of its agents within the scope of that agent's actual or apparent authority. Further an authorized agent's knowledge is imputed to the insurer regardless of whether that knowledge was ever received from the agent. This may lead the insurer to provide coverage in cases where details of the loss exposures were not fully communicated. In addition producers' authority to bind coverage through oral or temporary insurance contracts can lead to unintended coverage mistaken designations regarding which insurer is providing coverage and ultimately insureds left without coverage for losses they thought were covered. Finally producers can appoint subagents who may or may not have the authority they appear to have. For all these reasons the extent of producers' authority can significantly affect agency relationships and even the wellbeing of customers.
insurance producer
Any of several kinds of insurance personnel who place insurance business with insurers and who represent either insurers or insureds, or both.
Producers' Notice and Knowledge
In an agency law any knowledge possessed by a general agent or special agent is considered to be possessed by that agent's principal as well. In an insurance context the authorized agent's knowledge is imputed to the insurer whether the insurer actually receives the information from the agent is irrelevant. Questions of imputed knowledge often arise when agents possess knowledge that would have caused the insurer to decline coverage had the insurer been aware of the information. In these circumstances a court will hold that the insurer knew what the agent knew and will typically find that coverage exists. Imputed knowledge also applies to a physical location to be insured. For example a court may hold that a binder conferring coverage on an insured's business is effective over an insurer's objection that it would not have provided coverage if it had known the location of the insured's property. In such a case the insurer's authorized agent might have been aware of the location of the property to be insured and assumed that the binder issued was broad enough to cover the location. The insurer's lack of actual knowledge would be irrelevant. A court might not be bind an insurer by a producer's knowledge in these circumstances. - When no actual agency relationship exists between the producer and the insurer. - When the agent has supplied false information. Therefore a general agent's knowledge is imputed to the insurer but under most circumstances an insurance broker's knowledge is not imputed. Cases involving soliciting agents are less clear and courts vary greatly on this matter. In cases that involve an agent being aware that information provided by an insured was false, many courts refuse to bind the insurer by that agent's knowledge. The agent's decision to act adversely to the insurer's interests breaks the agency relationship which is the basis of the imputed knowledge rule. No hardship results to the insured because the insured cannot claim to be an innocent third party. If an agent is unaware that information provided by an insurance customer is false no knowledge is imputed to the insurer. The insurer can avoid liability under the policy if it can prove fraud misrepresentation or some other defense.
Producers' Duties and Liability To Insurance Customers
Insurance producers often act on behalf of customers who know little or even nothing about insurance. Such customers expect producers to help them obtain the appropriate coverage. The law recognizes these expectations and imposes various duties and responsibilities on insurance producers. The standard of care imposed on producers reflects the public's expectations that producers be competent diligent loyal and professional. Producers may incur liability for failing to perform each duty underscoring how important it is for producers to understand their duties to the customers they serve.
Insurance Producer Classifications
Like other businesses, insurers act through various representatives to accomplish their goals. Some of these representatives are employees of the insurer and others are independent contractors who perform certain functions for the insurer. The acts of these representatives on behalf of the insurer may legally bind the insurer. The insurance business uses the generic term "insurance producer" to denote the broad category of persons involved in arranging the placement of insurance business with insurers. The term "producer" encompasses agents and brokers. An understanding of how the roles of agents and brokers interrelate is necessary to understand the respective duties of producers. The producer classifications have distinct legal significance, as the authority and potential liability of each type of producer differ significantly.
DUTY TO FOLLOW INSTRUCTIONS
Producers must follow insurers' general statements of authority and insurers' specific directions. A producer who exceeds the authority given or fails to comply with specific directions is liable to the insurer for resulting damages. Cases involving breach of duty to follow instructions arise in two situations. The first is improper use of binding authority. By agreement between the parties insurers frequently grant producers the authority to bind coverage on the insurer's behalf typically under a detailed statement outlining the circumstances under which the insurer can be bound. The doctrine of apparent authority can sometimes lead a producer to bind an insurer to cover certain risks beyond those authorized. If a producer to bind coverage contrary to explicit insurer instructions the insurer must provide coverage but can sue the producer for the amount of the loss. A second common situation involving breach of duty to follow instructions relates to an insurer's specific instructions to cancel reduce or otherwise limit coverage. A producer who has been instructed to cancel a certain policy and fails to do so is liable for the full amount of any loss that the insurer must cover. Similarly a producer who fails to limit coverage as instructed is responsible for the difference between coverage the insurer ultimately provided and the amount it would have paid if the producer had followed its instructions. A producer may have a defense against a lawsuit for failure to follow instructions if it was not given reasonable time to comply or if the insurer's instructions were unclear. A producer who has acted according to a reasonable interpretation of arguably unclear instructions is not liable.
Duties Producers Owe Their Customers
Producers owe their customers these five duties: - Duty to follow instructions - Duty to procure insurance - Duty to maintain coverage - Duty to place insurance with a solvent insurer - Duty to advise
Producers' Duties and Liability to Insurer
Similar to their duties obligations to (principal) customers producers also have duties to their (principal) insurers. If they fail in their duty to disclose risks duty to follow instructions duties of loyalty and accounting or duty to transmit information properly producers may be liable to an insurer for any damages resulting from a breach of these duties.
Producers' Status as General Agents, Special Agents, or Brokers
The extent of a producer's authority varies depending on whether the producer is general agent special agent or broker. The general agent has the broadest authority of all insurance agents and fully represents an insurer meaning any action the general agent take takes according to the agreed on authority binds the insurer. General agents can accept loss exposures agree on and settle the terms of insurance waive policy provisions issue and renew policies collect premiums and adjust claims. Even if the contract does not confer the broad powers discussed the general agent may have those powers by apparent authority. If a contract between a producer and an insurer expressly limits the producer's power to soliciting business as is the case with many special agents any action the agent takes beyond soliciting and forwarding prospective business to the insurer usually will not bind the insurer unless an insured can establish apparent authority. The extent of producer's authority for brokers is different from authority for general agents and special agents. Brokers represent insureds. Thus the broker's principal is the insurance customer not the insurer. Accordingly an insurance broker usually has no actual or apparent authority to bind the insurer. Instead the broker typically has the power to bind the insurance customer. A broker's typical duties include these: - Procuring insurance for the insurance customer - Selecting the insurer to provide the desired coverage - Arranging for payment of premiums - Cancelling and receiving unearned premiums on a policy the broker the obtained - Obtaining a new policy upon cancellation of one previously obtained A broker can be both an agent and an insured's representative in two instances. First through apparent authority the broker is legally the insurer's agent if the insurer allows the broker to act in a manner leading a reasonable third party to believe that the broker is the insurer's agent. Apparent authority does not arise merely by the insurer's furnishing a broker with application forms that the broker routinely submits to the insurer. However a broker who has a particular insurer's applications forms receives premiums ostensibly on that insurer's behalf and issues material identifying the customer as presently covered by that insurer can be the insurer's agent. Second some state statues provide that for some specific purposes a broker is the insurer's agent. Once a policy is issued the broker acting on the insured's behalf is the insurer's agent regarding premium payments and the broker's receipt of the payments is effectively the insurer's receipt. The reasoning behind such statutes is that once a policy is issued the broker who facilitated the placement of the customer's business with the insurer is indistinguishable from an insurance agent in the eyes of many customers; therefore the laws provide some extra protection to insurance customers.
Producer's authority to Bind Coverage
The need for immediate insurance coverage arises frequently. In many cases people or organizations acquire property or assume duties with little or no advance notice. Before issuing a policy on a given loss exposure however insurers usually must undertake an underwriting process that can take several weeks or longer to complete. Because this delay leaves applications unprotected many insurers authorize producers to issue temporary oral or written policies pending acceptance of the application. These are the two most common legal issues regarding oral and temporary insurance contracts: - A producer's lacl of authority to form the contract - A producer's failure to designate which insurer was bound by the oral or temporary contract. If the producer has actual authority the oral or temporary insurance contract is valid and binding on the insurer. Next the focus shifts to whether the producer had apparent authority determined by a third party with a reasonable belief that a general agent had the power to bind coverage orally or in writing. If the producer is not a general agent and no apparent authority exists the producer's oral or temporary contract would not bind the insurer. If a producer who represents multiple insurers contracts with a customer and then fails to designate the insurer providing coverage begore a loss occurs the legal issue is which if any insurer is liable for the loss. Courts look for reliable evidence that the producer intended to bind a particular insurer to the contract as in these examples: - The producer represents only one insurer that issues the coverage on the terms sought. - In previous dealings the producer has placed all the insured's business with one insurer. - The producer issued a note or memorandum before the loss showing an intention to form the contract with a particular insurer. A mere mental note or a subsequent written one does not bind an insurer. If the evidence does not reveal that the producer selected an insurer before the loss the contract does not bind any insurer. The insured has no coverage bu can sue the agent for errors and omissions and seek damages equivalent to the loss.
Duty of Loyalty and Accounting
The producer also owes the insurer loyalty and accounting. In many cases insureds forward their premium checks to their insurance producer rather than directly to the insurer. Under the law payment to a producer who has actual or apparent authority constitutes payment to the insurer. For example an insured who gives the producer's office a premium check for the amount due one hour begore coverage is to lapse is covered for a subsequent loss whether or not the premium check ever reaches the insurer. The producer must receive and process premium payments on the insurer's behalf and transmit them to the insurer promptly The producer also must keep accurate records of premiums received and verify receipt of correct compensation for coverage in force. A producer who causes any loss to an insurer because of improper accounting is liable to the insurer for the financial consequences.
Duty to Transmit Information Properly
The producer has the duty to transmit information properly to the insurer. One type of material information is a report of the facts surrounding a loss. When an insurance agent receives notice of a covered loss typically in a report completed by the insured the agent must promptly forward it to the insurer. A producer is liable to the insurer only if his or her failure to forward such records causes the insurer harm. For example a producer receives a report of an insured's loss shortly after it occurs but waits six months before informing the insurer of the loss. If the six months' delay has not prejudiced the insurer's ability to investigate and resolve any claims resulting from the loss the insurer has no cause of action against the producer. In some instances the producer's failure to promptly transmit important information does cause loss to the insurer. For example an insured who is being sued sends notice of the suit to the insurance producer who should then inform the insurer. Typically an insured's answer to a complaint is due at the court within a specified period. If the insurer fails to appear in court or to answer a pleading on behalf of the insured the result is a default judgment against the insured - that is the insured for the consequences of this judgment. In this case the insurer can sue the producer for failure to transmit notice of a lawsuit promptly. The producer is liable to the insurer for the difference between what the insurer ultimately paid to resolve the liability claim and what it would have paid with promptly notification of the loss. The producer might be liable for the entire loss if the insurer had a valid defense to the insured's liability that was not asserted because of lack of notice.
Producers' Defenses to Liability
The producer may have a defense to an allegation of breach of a duty owed to the customer. The producer can avoid liability by showing that his or her conduct was reasonable and appropriate or that factors not within the producer's responsibility caused the customer's damage. These are five defenses available to the producer: - The producer assumed no duty to the customer - An agreement forms the basis of the producer customer relationship and the producer generally owes only duties that have been expressly or implicitly assumed. Therefore a producer who has not agreed to obtain or maintain insurance (or perform any other duty ) for the customer is not liable for breach of any such duty. Producers should retain god written documentation of conversations and transactions with their customers. - The producer did not breach a duty to the customer the producer who has followed clear instructions fully and completely or followed ambiguous instructions according to a reasonable interpretation of their meaning is not liable to the insurance customer. When allegations of failure to procure insurance arise the producer has a valid defense if he or she acted reasonably and promptly on the customer's behalf and kept the customer informed about the progress toward obtaining the requested insurance coverage. Additionally the producer need not anticipate all possible contingencies or give perfect advice on insurance matters. - The insurance customer was partly at fault although insurance customers can generally rely on the producer's knowledge care and skill they must also act reasonably. If the customer's injury or loss was his or her own fault in whole or in part the producer can offer this conduct in defense to the customer's claim. Possible defenses include the customer's failure to cooperate in furnishing information for prospective insurers omitting details for underwriting or giving misleading or erroneous instructions - The insurance customer failed to read the policy the strict application of this defense has eroded over time and varies by state. Some courts in the absence of a producer who has intentionally misrepresented policy provisions or coverage allow this defense when a reasonable examination of the policy reveals that exclusions limitations and conditions are clear without extensive analysis or interpretation. - Insurance was not available to the customer this defense is based on the fact that if the producer cannot obtain insurance the producer's alleged failure to act appropriately is not the true cause of the loss. Such a defense is particularly appropriate if the customer clearly specified certain terms or a price limit that was necessary and no insurance was available within these parameters. However if the insurance desired was simply more expensive than anticipated or was otherwise available on less favorable terms the producer must still locate the insurance and advise the customer of its terms and prices.
insurance agent
a legal representative of one or more insurers for which the representative has a contractual agreement to sell insurance
Termination of Producer Authority
As with other agency relationships if one party no longer wants the relationship to continue that art has the power to terminate the relationship. Thus an insurer can revoke a producer's authority to act on the insurer's behalf even if a valid agency contract that would not support the termination exists between the parties. Usually the circumstances for termination of a producer/insurer relationship are specified in a contract. For example a contract might identify a period after which the relationship will terminate or it might set out circumstances that warrant termination of the relationship such as failure to meet production standards or producer misconduct. The producer/insurer agency relationship is terminated by any act of one of the parties that the other party might reasonably construe to show the intent to terminate. Typically termination occurs through a written or an oral communication which severs the producer's actual authority to bind the insurance principal. The principal must take appropriate action to inform third parties that the relationship has terminated to avoid the potential for apparent authority. After notification to third parties the producer cannot bind the insurer in any way regarding that party. If a third party who has dealt with the producer does not receive notification however the producer's acts purportedly on the insurer's behalf might bind that insurer. The producer can bind the insurer regarding third parties with whom he or she has not dealt previously if these parties had prior knowledge of the existence of the former agency relationship but no notice of the termination. The safest way to avoid the possible adverse consequences of apparent authority is for the insurer to take these actions: - Notify all third parties known to have dealt with the producer. - Repossess from the producer any evidence of the agency relationship such as application forms and insurer stationary Although termination by the parties contract or expression is most common the agency relationship can terminate by other means including operation of law the producer's death or insanity or the insurer's insolvency.
A Producer's Liability to the Insurer
Chelsea is an insurance agent associated with InsurInc. Formerly IncurInc gave Chelsea express binding authority regarding certain specified types of small commercial exposures. InsruInc has provided Chelsea with appropriate binder and application forms as well as rating manuals and policy forms. For the last five years she has issued binders for these types of exposures. Recently InsurInc underwriters have noticed increasing losses in Chelsea's commercial book of business. InsurInc's Underwriting manager decides that a full review of Chelsea's accounts is necessary and withdraws Chelsea's binding authority for commercial business pending the outcome of the review. After Chelsea receives notice of the withdrawal of her authority from InsurInc she meets with Adam to discuss insurance for his small business. This exposure falls within the category of those for which Chelsea could formerly bind coverage. Chelsea believes that InsurInc would accept this risk. Despite the absence of actual authority she binds coverage for Adam. Three days later during the binder term Adam sustains a loss. Would InsurInc be required to cover this loss? - InsurInc must cover the loss. Although Chelsea did not have actual authority to issue the binder she had apparent authority to do so. Would Chelsea be liable to InsurInc for the cost of Adam's loss? - Chelsea would be liable to InsurInc for breach of the express direction not to bind any commercial insurance coverage.
Apparent Authority
Even without authority an agent can have apparent authority if the producer's or insurer's actions lead a third party to believe that a producer has authority, the insurer does not give apparent authority to the producer not does the producer create this authority. Apparent authority usually arises in one of two overlapping circumstances: - An insurer grants less actual authority to the producer than producers in the same position in that business usually have. - The method of operation of the principal's business differs from that of there similar business in the principal's area. If a third party's assumptions about an agent's authority are unreasonable and do not have a factual basis the insurer can legally deny the existence of the agency relationship. Likewise the purported agent's statements or actions are insufficient to create an agency by estoppel the insurer's acts alone create the apparent authority. For example if an insurance agent created the appearance of an agency relationship with an insurer by falsely claiming to be its agent, misappropriating its company logo or copying its applications without authorization the insurer could deny the agency relationship because it did nothing to create this misunderstanding. However if the insurer becomes aware of this situation and fails to act in a timely fashion an agency by estoppel can arise.
Apply your knowledge
In late July, producer Kaitlin receives written instructions from InsurInc underwriter Maddie to nonrenew insured Brandon's homeowners policy "at its renewal date at the end of the calendar year." Kaitlin agrees and makes a note in Brandon's file to address this in October to comply with her state's cancellation notice requirements. A few weeks later on August 12 Brandon calls Kaitlin to report a serious liability claim on his property. He says he's reporting the claim just days before August 15, when his policy term is scheduled to end, but assures that he has every intention of renewing the policy after he receives a new bill from InsurInc the usual renewal procedure. He also correctly notices that the bill usually arrives before this time each year and asks Kaitlin to check on this for him. After Kaitlin reports the claim to InsurInc Maddie responds that she had asked Kaitlin to nonrenew the policy. Is Kaitlin liable for not following the insurer's instructions? --Feedback - Maddie gave Kaitlin confusing and inaccurate instructions ( the incorrect nonrenewal timetable for Brandon's policy) causing her to schedule the notice of nonrenewal improperly. Even if Kaitlin had promptly checked on Brandon's renewal date (which was August 15 as Brandon mentioned) she probably would not have had sufficient time to nonrenew his policy depending on stat regulations. As it turned out Kaitlin missed any chance of nonrenewing the policy within the required time limits. However because the instructions were not clear and she would not have had a reasonable amount of time to comply with them, Kaitlin has a defense against a lawsuit for failure to follow instructions. In any event InsurInc will cover the claim that occurred during the policy term and that was reported in a timely fashion. Maddie should have brought this matter to Kaitlin's attention sooner and provided clearer instructions. InsurInc and Kaitlin will need to follow the required policy procedure to cancel the policy in the future.
Producers' Appointment of Subagents
In many instances producers employ people to assist them in various aspects of their duties. These individuals are subagents because they are the producer's agents. Insurance producers also may use the services of clerical sales or marketing personnel. A general rule is that an insurance producer cannot delegate duties that involve the producer's individual care skill and judgement. The appointment of subagents is permissible because of these three exceptions to a general rule against delegation to subagents: - Producers can appoint subagents to discharge their mechanical clerical and ministerial (nondiscretionary) duties including tasks relating to the placement or renewal of insurance with the producer's principal insurance agency. These tasks include soliciting insurance applications countersigning insurance policies when discretion is not involved (if state law allows) delivering policies and collecting premiums. - A subagent can discharge even discretionary duties and those involving skill and judgment when those acts are ratified by the insurance producer. For example a producer could authorize a subagent to bind coverage for an insurer or could ratify the subagent's act. As long as the producer accepts full responsibility for the subagent's actions a court will view those actions as the producer's actions. - A producer is authorized to appoint subagents when discharging the producer's duties to the insurance principal would not otherwise be possible. For example, a producer may need to appoint a subagent to conduct business in another state. If the insurer has authorized the producer to market its products in the state and state law allows such marketing only by residents of that state the producer may appoint a resident subagent. The doctrine of apparent authority also can apply to subagents. To the public an insurance producer's subagents appear to have authorization to act for the insurer even when they do not have such authority. One frequent example involves commitments by producer's office employees to extend coverage in various situations. Generally the insurer is bound by these commitments even if the employee acted without actual authority.
Third Party Suit Against Producer
Javier owner of a moving company obtains his business and personal insurance through Insurance Agency. Recently he met with Danielle an Insurance Agency Broker to review his business insurance. Javier advised Danielle that he will soon acquire two new trucks and as of July 30 of this year he will need full liability coverage on these trucks. Additionally Javier said that he needs coverage for any damage on these trucks. Additionally Javier said that he needs coverage for any damage to his customers' property while in the custody of his company regardless of whether any member of his company is at fault. Danielle said that she will obtain this coverage. Danielle does not obtain the liability coverage that Javier requested Later one of Javier's new trucks is involved in a serious accident destroying the household property of his customer Sergey. Sergey had no insurance for this property. He relied on Javier's insurance during the move. As the insurance customer Javier would have an action against Danielle for failure to follow instructions and for failure to procure insurance. However any lawsuit Sergey files against Danielle probably would not be successful. Sergey was not a party to Javier's and Danielle's producer customer relationship and therefore acquired no rights under their contract.
Producers' Duty To Maintain Coverage
Producers also owe customers the duty to maintain coverage. A producer who simply arranged insurance on a customer's behalf has no duty to advise the customer of cancellation or nonrenewal. The insurer usually handles such notifications so the producer can reasonably rely on this practice. If by agreement however the producer assumes the obligation to advise the customer of an impending lapse in coverage the producer must do so or be liable to the customer for loss resulting from cancellation or nonrenewal. Additionally a producer who previously advised a customer of a pending coverage cancellation or nonrenewal especially if he or she has done so consistently over long periods of time might be liable for damages resulting from the failure to give notice at a later time. The producer's occasional reminder that a premium is due would probably be insufficient to prove the assumption of such a duty or to justify the customer's reliance upon it
Producers' Duty to Advise
Producers have the duty to advise their customers. Customers generally do not regard insurance producers as mere order takers but seek producers who are professional and knowledgeable about the insurance producers they market. However the producer's liability for advising guiding or directing a customer after procuring insurance tends to be based on the particular established relationship between producer and customer the amount of involvement in the customer's insurance matters the complexity of insurance coverages the actions of advising and counseling in place of mere order taking and the extent of customer reliance on the producer's expertise. To have a permanent and unambiguous account of all discussions and recommendations producers should keep written documentation of their advice to all insurance customers.
Producer's Duty to place insurance with a solvent insurer
The insurer's solvency should be one of the most important criteria for placing insurance business. The producer is not usually liable for any loss to the insurance customer resulting from an insurer's insolvency. The producer is not the guarantor of the insurer's financial condition or solvency. However a producer might be liable for negligently placing business with an insurer if the producer either knew or should have known of the insurer's insolvency the status of which is easily attained by staying current on public information financial rating services and information financial rating services and information from a state department of insurance. The producer should make an appropriate record of any such disclosure of financial status to a customer. A producer should also be careful when placing business with an insurer not legally admitted to do business in a state. All states have excess and surplus lines (E&S) statutes that establish requirements for procuring policies from nonadmitted insurers. For example only certain producers may be authorized to sell E&S insurance, E&S insurers may have to comply with capital requirements to be state approved as nonadmitted insurer's and producers may need to notify insureds of a nonadmitted insurer's status. A producer failing to follow these statues might be liable to the insured for any unpaid claims if the unauthorized insurer becomes insolvent.
Actual Authority
Actual authority if often intentionally granted by the principal (insurer) to producers, but a principal can also confer this authority when it allows a producer to believe that he or she possesses it. Typically the producer and the insurer established the terms of their principal/agent relationship through a formal written contract that grants the producer express authority. If the contract does not state an authority, the producer does not have that express authority. An insurance producer who is an excusive agent of one insurer might have one contract while a producer who is an independent agent representing multiple insurers might have several contracts. The application for insurance and the insurance policy itself can also limit the extent of the producer's express authority. For example a clear statement on the insurance application that the producer has no authority to bind coverage eliminates the producer's express power to do so. A producer has no express or implied authority to act contrary to those limitations. Unless the producer has some other basis for the authority such an action does not bind the insurer. Actual authority can also be implied. Authority express agreements underlie most principal/agent relationships the parties can create the relationship through less formal means. For example an agent can create an agency relationship merely by submitting an insurance application if the insurer has previously accepted applications that the producer solicited and submitted. The agent has the implied authority to bind the insurer in this manner. The insurer must voluntarily accept the applications from the agent and then voluntarily issue policies. Merely forwarding applications for insurance under an automobile assigned risk or other residual market automobile insurance plan does not create an implied authority for the agent.
Example: Producer's Apparent Authority
Beta Agency advertises that it is an agent for Jumbo insurance company. The other insurance agency in town Alpha Agency is also an agent for Jumbo. Alpha is a general agent for Jumbo with express authority to issue auto insurance policies for Jumbo. Beta is a special agent for Jumbo with authority only to submit applications for auto insurance policies. After receiving a quote from Alpha for an auto insurance policy with Jumbo Henry goes to Beta Agency to compare prices. Beta quotes Henry a price that is $50 lower for a Jumbo auto policy. Henry pays the premium to Beta and Beta tells Henry that the policy is in effect. There is no statement on Jumbo's application from regarding authority of the agent to bind coverage. Jumbo's price for the policy is actually the amount that was quoted by Alpha. However Beta had apparent authority to Henry to quote a price for the policy. Jumbo may need to issue Henry a policy although Jumbo may seek to recover the additional $50 from Beta.
Producers' Duties and Liabilities to Third Parties
The relationship between the principal (customers) and agent (producer) is based on consent whether express or implied. The breach of any duty a producer owes to a customer does not create any rights in third parties. A third party who intends to sue an insurance customer (typically in tort) cannot sue a producer who wrongfully failed to assist the customer in obtaining insurance coverage for the event that is the subject of the suit. Many courts have held that the producer owes a duty to act completely and appropriately only to the producer's principal but not to any third party. Even if a third party could have collected from the customer if the producer had discharged all duties appropriately and arranged for insurance coverage but now cannot collect, the third party would usually not have any rights against the producer. Some courts however have recognized a third party's right to sue an insurance customer's producer under certain circumstances. Generally these cases concern automobile or workers compensation insurance and are based on the contractual principal of third party beneficiary rights. In some cases the importance of drivers' liability insurance as a source of compensation for other drivers has led courts to consider drivers who suffer loss from another driver's conduct as third party beneficiaries. In other cases injured drivers can sue negligent drivers' insurance producers if the negligent driver lacked liability insurance because of the producer's breach of duty.
DUTY TO DISCLOSE RISKS
The producer's first duty to the insurer is the duty to disclose risks. Producers have the first contact with prospective insureds and may even know them personally. Frequently the producer is directly involved in the underwriting process and is sometimes responsible for obtaining all the information needed to make an underwriting decision. Accordingly producers owe a duty to their insurer principals to fully disclose any information that is material to the underwriting decision. For information to be considered material it must affect the coverage terms premium or decision to issue an insurance policy covering the risk. For example producer Gustav fails to fully disclose all the premises risks and hazards of a prospective insured's property. If the insurer establishes that it would not have issued the policy had it received the appropriate information the producer is liable to the insurer for the amount of the loss the insurer must pay to the insured. Similarly a binder would not be appropriate if the producer knew that a building was below the applicable underwriting standards. The producer owes a continuing duty to protect the insurer and cannot let coverage take effect if it's based on false or inaccurate information. If the insurer would have issued a policy but only at a higher premium, the producer would be liable to the insurer for the difference in the premium. The producer is not strictly responsible for information not known. For example producers in some lines of insurance assist in obtaining completed applications but do not become further involved in the underwriting process. These producers must truthfully and accurately note the information they receive from the insurance customer. However absent specific agreements with their insurer principals producers need not investigate the accuracy of the information they receive. Failure to disclose immaterial information probably would not subject the producer to liability.