Key Takeaways
- AGENTS represent the insurance company and may have BINDING AUTHORITY; BROKERS represent the insurance buyer and typically do not bind coverage
- Three types of authority: EXPRESS (written in contract), IMPLIED (necessary to carry out express), and APPARENT (public reasonably believes agent has)
- Producers have FIDUCIARY DUTY—premiums collected are held in TRUST for the insurer; commingling funds is prohibited
- BINDERS provide temporary evidence of coverage until the policy is issued—typically valid for 30-90 days
- Premium trust accounts must be maintained SEPARATELY from personal/business accounts; misappropriation is a criminal offense
Producer Authority and Responsibilities
Agent vs. Broker
| Aspect | Agent | Broker |
|---|---|---|
| Represents | The insurance company | The insurance buyer |
| Appointment | Appointed by insurer | Typically not appointed |
| Binding Authority | Usually HAS binding authority | Limited or NO binding authority |
| Payment | Commission from insurer | Commission from insurer (but represents buyer) |
| Legal Relationship | Agent of the insurer | Agent of the insured |
Exam Key: Even though brokers represent the buyer, they typically receive payment from the insurer. This creates potential conflicts of interest.
Types of Authority
1. Express Authority
Definition: Authority explicitly granted in writing via the agency contract.
Found In:
- Agency agreement/contract
- Appointment letter
- Underwriting guidelines
- Policy binding limits
Example: "Agent may bind commercial property up to $500,000."
2. Implied Authority
Definition: Authority reasonably necessary to carry out express authority.
Key Points:
- Not explicitly stated but necessary for normal business
- Cannot contradict express authority
- Flows from express authority
Example: If authorized to sell policies, implied authority exists to collect premiums and issue binders.
3. Apparent Authority
Definition: Authority the public reasonably believes the agent has based on the insurer's actions.
Key Points:
- Based on how insurer presents the agent
- Insurer is bound even if authority wasn't actually granted
- Creates liability for insurer
Example: Insurer allows agent to use company letterhead and office—public assumes agent has authority to bind coverage.
Binding Authority and Binders
What is a Binder?
A binder is temporary evidence of coverage until the policy is issued.
| Element | Requirement |
|---|---|
| Duration | 30-90 days maximum |
| Form | Oral or written (written preferred) |
| Content | Coverage, limits, premium, effective dates, insurer |
| Effect | Immediate coverage upon issuance |
Who Can Issue Binders?
- Agents with express binding authority
- Must stay within authorized limits
- Must follow underwriting guidelines
Fiduciary Duty
What is Fiduciary Duty?
Producers hold money in trust for another party—premiums belong to the insurer from the moment of collection.
Requirements
| Duty | Details |
|---|---|
| Premium Trust | Premiums collected are insurer's property |
| Separate Accounts | Must maintain separate premium trust account |
| No Commingling | Cannot mix fiduciary funds with personal/business |
| Accurate Records | Must maintain accurate accounting |
| Timely Remittance | Must forward premiums per agreement |
Violations
- Misappropriation: Using fiduciary funds for personal use = theft/embezzlement
- Commingling: Mixing trust funds with other funds = violation
- Penalties: License revocation, criminal prosecution
Producer Compensation
Types of Compensation
| Type | Description |
|---|---|
| Commissions | Percentage of premium (new and renewal) |
| Fees | Separate service fees (where permitted) |
| Contingent Commissions | Bonus based on volume, profitability, retention |
Disclosure Requirements
- Contingent commissions may require disclosure
- Fees must be disclosed in writing
- Cannot be excessive or unfairly discriminatory
An insurance agent uses company letterhead and has a sign with the company logo outside their office. A customer assumes the agent can bind coverage. This is an example of:
A producer collects $5,000 in premiums from clients. These funds are considered:
12.3 Unfair Trade Practices
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