1.5 Parties, Agents vs. Brokers, and Authority

The Parties to the Contract

A property/casualty contract has two principal parties:

• The insurer — the company assuming the risk (also called the carrier or underwriter).
• The insured — the person or entity whose risk is covered. The named insured is listed on the dec page; additional insureds and first/third parties may also appear.

A first-party claim is filed by the insured for the insured's own loss; a third-party (liability) claim is brought by someone else against the insured.

Types of Insurers

Domestic = formed in this state; Foreign = another U.S. state; Alien = another country. An admitted (authorized) insurer holds a certificate of authority; a nonadmitted insurer writes surplus-lines business.

Producers: Agents vs. Brokers

Both are commonly licensed as producers, but the legal distinction is heavily tested.

• An agent legally represents the insurer (the principal). The agent's knowledge is imputed to the company, and the agent can usually bind coverage.
• A broker legally represents the insured/applicant, shopping the market on the client's behalf. A broker generally cannot bind the insurer.

Mantra: agent = company; broker = client.

Domestic, Foreign, and Alien Insurers

A recurring recall item: an insurer is domestic in its state of incorporation (a company chartered in Minnesota is domestic in Minnesota), foreign when chartered in another U.S. state, and alien when chartered in another country. An admitted (authorized) insurer holds a certificate of authority from the state; a non-admitted (surplus lines) insurer does not and is accessed only for hard-to-place risks through a surplus-lines licensee.

Broker vs. Agent on the Loss

Tie authority back to who bears the consequence of an error. Because the agent legally represents the insurer, the agent's knowledge is imputed to the company — if the applicant told the agent a material fact and the agent failed to record it, the insurer is generally charged with that knowledge. A broker represents the insured, so the broker's errors fall on the insured (and the broker's E&O policy), not automatically on the carrier. This single principle resolves many "who is responsible?" fact patterns.

The Three Types of Agent Authority

An agent binds the insurer only within the authority the company grants. Three forms exist:

• Express authority — powers explicitly written in the agency contract (e.g., 'may bind auto risks up to $500,000').
• Implied authority — powers not written but reasonably necessary to carry out express authority (renting an office, ordering supplies).
• Apparent authority — authority the public reasonably believes the agent has, based on the insurer's conduct (company signs, supplies, prior dealings) even if not actually granted.

Apparent authority is the trap. If an insurer lets an agent use company stationery and signage, the public may reasonably assume the agent can act — and the insurer can be bound through estoppel, even where actual authority was lacking. The exam frames this as a scenario where the company tries to deny coverage an agent appeared authorized to provide.

Fiduciary Duty and Commingling

A producer who collects premiums holds them in a fiduciary capacity — the money belongs to the insurer/insured, not the producer. Commingling (mixing premium funds with personal or business operating funds) is a common license violation. Premiums must be accounted for and remitted promptly; misappropriation can trigger license revocation and criminal charges.

Other Field Roles

• Claims adjuster — investigates and settles claims. A company (staff) adjuster works for the insurer; an independent adjuster is hired by the insurer; a public adjuster is hired by and represents the insured for a fee.
• Underwriter — selects and prices risks for the insurer.
• Solicitor — solicits business but cannot bind.
• Surplus-lines broker — places coverage with nonadmitted insurers when admitted markets decline the risk.

Producer Compensation and Conduct

Producers earn commissions (a percentage of premium). A few National-exam conduct rules recur: rebating (returning part of the commission/premium as an inducement) is prohibited in most states; twisting (misrepresenting facts to induce a policyholder to replace coverage) is prohibited; and misrepresentation of policy terms is an unfair trade practice. Knowing whom the producer represents drives whether these acts breach a duty to the insurer or the insured.

Experience Modification (Mod) Factor

In workers compensation and some commercial lines, an experience modification factor adjusts premium based on the insured's own loss history versus the industry average. A mod of 1.00 is average; below 1.00 is a credit (better-than-average losses lower premium) and above 1.00 is a debit (worse losses raise it). Example: a $40,000 manual premium with a 0.85 mod yields $34,000; the same premium with a 1.20 mod yields $48,000. The mod rewards loss control and ties to the risk-reduction concept from Section 1.1.

Solicitation, Application, and Underwriting Flow

The sales-to-issue flow is tested as a sequence: the producer solicits and helps the applicant complete the application (the primary source of underwriting information), collects any premium, and may issue a binder. The insurer's underwriter then accepts, declines, or counteroffers using the application, loss-run history, inspections, and loss data. Only after acceptance and premium payment is the policy issued, converting the temporary binder into permanent coverage.