Nearly all commercial insurance is obtained through insurance agents, either “captive” agents or so-called “independent” agents (often called “brokers”). Captive agents obtain insurance for their clients from a very limited number of insurance companies, for example, State Farm, Allstate, and their affiliates. Brokers, on another hand, obtain insurance on behalf of their clients from any number of insurers who are willing to make a proposal in response to a “submission,” i.e., an invitation to quote a policy. (Unless required by the context, the term “agents” as used in this post will mean both captive agents and brokers).
Agents are often, but not exclusively, compensated on a commission basis; that is, a certain percentage of the yearly premium paid to the insurer goes to the agent. With larger accounts, it’s common to see a fixed fee arrangement – the agent provides a given set of broking services for a specified payment. In either case, the agent’s basic function is to act as an intermediary between its policyholder/client and the insurance companies to obtain insurance coverage. But all agents perform (or should perform) additional functions in exchange for their commission or other payment. The nature and extent of these services may be documented in a “professional services agreement” or similar contract. This post briefly identifies those other services and makes suggestions as to what the client ought to expect from its agent.
Aside from insurance policies themselves, one of the most valuable things a policyholder/client gets from its insurance agent is advice:
Advice on such matters was something policyholder/clients traditionally expected and relied on from their agents. With respect to Louisiana agents, however, that all changed with Isadore Newman School v. J. Everett Eaves, Inc., 2009-2161 (La. 07/06/10); 42 So.3d 352. There, the Supreme Court abandoned the long-held rule that insurance agents “are not mere order takers.” Since Newman, an insurance agent’s liability to its client is limited to circumstances in which the agent (i) agreed to procure the insurance, (ii) failed to use reasonable diligence in attempting to procure the insurance and failed to notify the client promptly that it did not do so, and (iii) acted in such a way that the client could assume it was insured. There is no liability for a pure failure to affirmatively provide sound advice regarding, for example, the best coverages and adequate limits for the client’s business. Nevertheless, agents—that is, good agents who want to keep customers—still provide practical advice to their clients. And policyholder/clients ought to expect and demand the agent’s best advice. It’s just that since Newman, there might be no liability on the agent’s part for providing bad advice (or even no advice).
Most agents provide services in response to the client’s loss, be it third-party or first-party. Claims services are one of the functions the policyholder/client pays for through the commission or other payment it made to the agent; the best practice is for the client to take advantage of those services. This service can include notification of loss to the insurance company, guidance in filling out claims forms, explaining claims decisions to the client (or refuting the insurer’s claims position), and assisting with claim close out (e.g., completing proofs of loss or other documentation of claim resolution). With smaller agencies, the claims services may be provided by the agent personally, or through a customer service representative, often called a “CSR.” Larger agencies have dedicated claims teams lead by “claims advocates” to guide the client through the entire claims process and to liaise with the insurer’s claims personnel.
Better agents also provide at least some level of advocacy on the client’s behalf in the context of an adverse claims decision by the insurer. The relative intensity of the claims advocacy provided varies both by the type of agent, its size, its philosophy, and the personalities and attitudes of its personnel. On one end of the spectrum is the claim support provided by a captive agent. The captive agent is normally considered the mandatary of the insurance company. See Bible World Christian Ctr. v. Colony Ins. Co., No. 15-397, 2016 WL 7380979, at *4 (M.D. La. Dec. 20, 2016); Flex Energy, LLC v. St. Paul Surplus Lines Ins. Co., No. 6:09-1815, 2011 WL 2434095, at *4 (W.D. La. June 13, 2011). Perhaps more importantly, experience shows that captive agents perceive themselves to be more answerable to the insurer. Consequently, claims advocacy from captive agents may be quite limited, consisting only of making notifications and providing guidance on how to fill out forms. Independent agents (who are usually the policyholder/client’s mandataries) tend to be more aggressive, with the style of advocacy provided ranging from mild to ferocious. And the size and sophistication of the agent usually translates into more knowledgeable, comprehensive, and aggressive claims services. The client may want to consider what level of claims services will be provided when making its decision as to which agent to pick.
Daily Administrative Support
Less controversial is the daily administrative support provided by the agent. The sort of things needed on a regular basis include generating insurance certificates and answering simple questions about the policy. More advanced agents provide a contract review service, in which a contract specialist or even an attorney will provide an insurance compliance review (for example, determining the client’s ability to comply with insurance requirements levied upon it by contractual counter-parties), light commentary on legal issues, and spotting significant commercial and operational issues. Sometimes this type of administrative support is limited to those clients with larger annual insurance budgets.
When provided, this particular service can be abused, with some clients tempted to save money by leaning on the agent for the exclusive source of contract review instead of retaining a lawyer to review and negotiate contracts. That approach isn’t good for anyone; the agent puts itself at risk of practicing law without a license or in failing to make contract review expectations clear to the client. And the client does not receive the full, dedicated contract review that would be provided by an attorney who is particularly skilled in contract review and negotiations.
In summary, policyholder/clients should recognize the extra services insurance agents provide aside from merely purchasing insurance. The client should expect and demand these services in the context of the amount of premium paid, the agency’s size, and its skill set. The extent of services to be provided should be documented to avoid disappointment or even disputes. Doing so ensures that the client gets the benefit of the bargain it made when it paid a commission or other fee, and creates a better understanding of the client’s rights and responsibilities under insurance policies.
About the Authors:
Harold J. Flanagan
Insurance Law Committee Chair
Flanagan Partners LLP
Meghan F. Grant
Flanagan Partners LLP
Written on behalf of the Insurance Law Committee.