Understanding Insurance Law for the Life and Health Insurance License Exam
Terms you need to understand:
- Express authority
- Implied authority
- Apparent authority
- Policy face
- Insuring clause
- Aleatory contract
- Contract of adhesion
- Unilateral contract
- Executory contract
- Conditional contract
- Personal contract
Concepts you need to master:
- Presumption of agency
- Agent errors and omissions exposure
- Contract formation
- Offer and acceptance
- Competent parties
- Legal purpose
- Utmost good faith
- Parol evidence rule
An understanding of the law of agency is important because an insurance company, like other companies, must act through agents.
Agency Law Principles
Agency is a relationship in which one person is authorized to represent and act for another person or for a corporation. Although a corporation is a legal "person," it cannot act for itself, so it must act through agents. An agent is a person authorized to act on behalf of another person, who is called the principal.
In the field of insurance, the principal is the insurance company and the sales representative or producer is the agent. When one is empowered to act as an agent for a principal, he or she is legally assumed to be the principal in matters covered by the grant of agency. Contracts made by the agent are the contracts of the principal. Payment to the agent, within the scope of his or her authority, is payment to the principal. The knowledge of the agent is assumed to be the knowledge of the principal.
Presumption of Agency
If a company supplies an individual with forms and other materials (signs and evidences of authority) that make it appear that he or she is an agent of the company, a court will likely hold that a presumption of agency exists. The company is then bound by the acts of this individual regardless of whether he or she has been given this authority.
An agent has one of three types of authority:
- Express authority is an explicit, definite agreement. It is the authority the principal gives the agent as set forth in his or her contract.
- Implied authority is not expressly granted under an agency contract, but it is actual authority that the agent has to transact the principal's business in accordance with general business practices. For example, if an agent's contract does not give him or her the express authority of collecting and submitting the premium, but the agent does so on a regular basis, and the company accepts the premium, the agent is said to have implied authority.
- Lingering implied authority means that the agent carries "signs or evidences of authority." By having these evidences of authority, an agent who is no longer under contract to an insurer could mislead applicants or insureds. When the agency relationship between agent and company has been terminated, the company will try, or should try, to get back all the materials it supplied to the former agent, including sales materials. On the other hand, the public cannot assume that an individual is an agent merely because he or she says so. The agent must carry the credentials (for example, the agent's license and appointment) and company documents (such as applications and rate books) that represent him or her as being an agent for an insurance company.
- Apparent authority is the authority the agent seems to have because of certain actions undertaken on his or her part. This action may mislead applicants or insureds, causing them to believe the agent has authority that he or she does not, in fact, have. The principal adds to this impression by acting in a manner that reinforces the impression of authority. For instance, an agent's contract usually does not grant him the authority to reinstate a lapsed policy by accepting past due premiums. If, in the past, the company has allowed the agent to accept late premiums for that purpose, a court would probably hold that the policyowner had the right to assume that the agent's acceptance of premiums was within the scope of his or her authority.
Collection of Premium
All premiums received by an agent are funds received and held in trust. The agent must account for and pay the correct amount to the insured, insurer, or other agent entitled to the money. Any agent who takes funds held in trust for his or her own use is guilty of theft and will be punished as provided by law.
Agent's Responsibility to Insured/Applicant
An agent has a fiduciary responsibility to the insured, the insurer, the applicant for insurance, current clients, and so forth. The agent has a fiduciary duty to just about any person or organization that he or she comes into contact with as part of the day-to-day business of transacting insurance.
As a fiduciary, the agent has an obligation to act in the best interest of the insured. The agent must be knowledgeable about the features and provisions of various insurance policies and the use of these insurance contracts. The agent must be able to explain the important features of these policies to the insured. The agent must recognize the importance of dealing with the general public's financial needs and problems and offer solutions to these problems through the purchase of insurance products.
As a fiduciary, the agent must collect and account for any premiums collected as part of the insurance transaction. It is the agent's duty to make certain that these premiums are submitted to the insurer promptly. Failure to submit premiums to the insurer, or putting these funds to one's own personal use, is a violation of the agent's fiduciary duties and possibly an act of embezzlement.
The insured's premiums must be kept separate from the agent's personal funds. Failure to do this can result in comminglingmixing personal funds with the insured or insurer's funds.
Waiver and Estoppel
The legal doctrines of waiver and estoppel are directly related to the responsibilities of insurance agents. An insurer may, by waiver, lose the right of making certain defenses that it might otherwise have available.
Waiver and estoppel often occur together, but they are separate and distinct doctrines.
The agent must be alert in his or her words, actions, and advice to avoid mistakenly waiving the rights of the insurance company. As a representative of the company the agent's knowledge and actions may be deemed to be knowledge and actions of the company.
Agent's Responsibilities to Company
The agent's contract or agency agreement with the insurer will specify the agent's duties and responsibilities to the principal. In all insurance transactions, the agent's responsibility is to act in accordance with the agency contract and thus for the benefit of the insurer. In accordance with the agent's fiduciary obligation to the insurer and his or her agency agreement, the agent has a responsibility of accounting for all property, including money that comes into his or her possession. As part of the agent's working relationship with the insurer, it is important that pertinent information be disclosed to the insurer, particularly with regard to underwriting and risk selection. If the agent knows of anything adverse concerning the risk to be insured, it is his or her responsibility to provide this information to the insurer. To withhold important underwriting information could adversely affect the insurer's risk selection process. In accordance with agency law, information given to the agent is the same as providing the information to the insurer.
It is the agent's responsibility to obtain necessary information from the insurance applicant and to accurately complete the application for insurance. A signed and witnessed copy of the application becomes part of the legal contract of insurance between the insured and the insurer.
Finally, the agent has a responsibility to deliver the insurance policy to the insured and collect any premium that might be due at the time of delivery.
The agent must be prepared to provide the insured with an explanation of some of the policy's principal benefits and provisions. If the policy is issued with any changes or amendments, the agent will also be required to explain these changes and obtain the insured's signature acknowledging receipt of these amendments.
Company's Responsibility to Agent
The company is required to permit the agent to act in accordance with the terms of the agent's employment contract, and the company must recognize all the provisions of that contract.
In addition, the company must pay the agent the compensation agreed upon in the contract, must reimburse the agent for proper expenditures made on behalf of the principal, and must indemnify the agent for any losses or damages suffered without fault on the part of the agent but occurring on account of the agency relationship.
Potential Liabilities of Agent/Errors and Omissions (E&O) Exposure
Errors and omissions (E&O) insurance is needed by professionals who give advice to their clients. It covers negligence, error, or omission by the insurer or producer who is the insurer's representative. E&O policies protect producers from financial losses they may suffer if insureds sue to recover for their financial loss due to a producer giving them incorrect advice (error) or not informing them of an important issue (omission). Because a producer's office is very busy, he or she must take special care to follow strict procedures in regard to taking applications, explaining coverages, collecting premiums, submitting changes to policies upon an insured's request, and preparing claim forms.