Personal Education Blog

The agency agreement spells out the contractual obligation of an insurance agent to his/her carrier.  Most importantly, the agency agreement establishes a fiduciary relationship between an insurance agent and the insurance company.  The agent must always act in the best interest of the carrier.

1.        OBLIGATION OF LOYALTY

An agent must act solely for the benefit of the insurance company in all matters connected with his/her agency agreement.

2.        OBLIGATION TO AVOID CONFLICTS OF INTEREST

This area has different meaning depending upon whether an insurance professional is a captive agent or an independent agent.

Captive agent will be held to a stricter standard.  For example, a captive agent cannot serve two carriers selling competing products at the same time.  It is possible for a captive agent to sell products not offered by his/her own carrier but sold through another carrier.

An independent agent represents both the carrier and the client at different points in the transaction.  The client is represented during the selection process.  Once a determination has been made in regard to the coverage to be selected, the independent agent owes the carrier his loyalty during the application, underwriting and recording keeping process.

3.       OBLIGATION TO OBEY

This obligation is very important in today’s litigious environment.  Many insurance companies have strict instructions in regard to solicitation of business and client communication.  These instructions limit the types of illustrations being used and the types of letters being sent to prospects.  Obviously these new instructions are being issued to protect both the agent and the insurance company and should be obeyed.

4.       OBLIGATION OF CAREFUL SOLICITATION

A goal of any insurance company is to cover as many healthy insureds as possible.  Another important factor is for the agent to seek out those prospects who can pay both the initial and future premiums.  Some companies pay on the advanced annual payment schedule , which  creates  temptation  to  some agents. Receiving seven or eight months commission as the first commission can lead to high policy lapse ratios (not to mention high agent turnover rate).  The agent should always attempt to  write  quality  business  for the insurance company.

5.     OBLIGATION TO PERFORM WITH SKILL AND CARE

An agent must execute his/her duties with the level of skill ordinarily possessed by individuals engaged in the same type of business.  An agent is obligated not to engage in business in which he/she is not capable of performing.  If the agent is dealing in an area with which he/she has little experience, it would be best to bring in a specialist.

6.      OBLIGATION OF FULL DISCLOSURE OF INFORMATION

An agent has an important duty to make full disclosure of all pertinent information that will affect the approval process of the application to the insurance company.  The agent’s obligation is to alert the company of facts about the applicant known to the agent.

Full disclosure is evident at two stages of the application taking stage.  First, during the application process and second, during the claim process.  For example, in a life insurance situation, the agent must list the applicant as a smoker even if the applicant states “he only smokes occasionally.

The main point is that the agent is the field underwriter.  The insurance agent must act on the carrier’s behalf.  The agent should “take the information” and avoid making any judgments.

7.       OBLIGATION OF BUSINESS TRANSACTION EXECUTION

This obligation arises most frequently in regard to premium payments and  submission of  applications. If the premium is not transmitted within a reasonable time frame, the possibility exists that a policy could lapse.  This will place the client in a position of vulnerability.  However, it also places the insurance company in a prone position as it could lead to charges that the company is obligated to honor any claims due to questionable behavior of its agent.

The insurance company is also placed into a situation of risk if an application is not submitted on a timely basis.  In most cases, a binding receipt has been given to the client as part of the application process.  This makes the carrier liable for claims until the application has been formerly acted upon.  Without the application, the insurance company cannot either accept or reject thus being able to protect itself from liability.

8.     OBLIGATION TO ACCOUNT FOR PREMIUMS

Many agents are authorized by their insurance companies to collect the initial premium payments in order to hasten the underwriting process.  Payment to an agent is considered payment to the agent’s insurance company.  Obviously, any funds collected are held in trust.  Keep in mind, most states consider it illegal to co-mingle premium dollars with personal funds.  It is sound business practice to maintain a separate bank account for the handling of premium dollars to avoid any hint of impropriety.

There are three additional areas of possible abuse concerning the fiduciary obligations that agents face.  These situations are replacement, use of free look provision, and rebating.

Idaho Insurance Continuing Education

Insurance Continuing Education

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