Holding Brokers and Agents Accountable for Obtaining Policies with Unfair Arbitration Agreements

Obtaining Policies

A person or business seeking insurance typically contacts an insurance producer, which is a broad term for an insurance agent, insurance broker, or other insurance representative who is authorized to sell insurance. Often, the terms are used interchangeably, but there are crucial differences between an insurance agent and an insurance broker. Whether a person or business seeking insurance contacts an insurance agent or contacts an insurance broker, the process of obtaining insurance begins with the prospective insured submitting an application for insurance. However, an insurance agent represents the insurance companies—or looks for clients who will buy insurance products—while an insurance broker looks for insurance products that will meet their clients needs.

The insurance agent assists the potential insured in filling out the application and then submits the application, on behalf of the applicant to one or more insurers. The insurance company or companies will then submit a proposal or offer of insurance to the agent, who then explains the difference in the proposals to the applicant. Often, a proposal might begin with disclaimers or disclosures highlighting the terms and conditions of the coverage offered, however, it is not meant to be all inclusive. The insurance agent is licensed by the state or states in which he, she, or it does business and may be authorized by a carrier or multiple carriers to transact or bind a client to a policy. The agent in return is paid by the insurer from a percentage of the premium—anywhere between 5 and 15 percent.

An insurance broker offers, negotiates, and sells policies to a person or business seeking insurance. The broker acts as an intermediary between insurers and customers but has a duty to act on behalf of and in the interest of customers—not the insurer—though a broker may have relationships with one or multiple carriers. The broker’s duty is solely to the applicant to apply for and negotiate the best possible insurance for the applicant, the broker’s client. The broker submits the client’s application to various insurance markets and then will organize those proposals received and present the options to the client. The broker has a responsibility to indicate the terms and conditions included, and those that are not included. Then it is up to the applicant to choose which proposed policy best meets his or her needs.  In return, the broker will expect to receive a fee from the applicant and may also receive commission paid by the insurance company.

Duties Owed to Customer

Generally, an insurance broker is not responsible for evaluating a customer’s specific needs or offer advice. However, insurance brokers are required to exercise good faith and make a reasonable diligent effort in procuring insurance requested by the client. Furthermore, the broker is obligated to obtain coverage that is not materially deficient and undertaken to be supplied at the requested limits within a reasonable time.

Duty to Procure: An insurance broker who agrees to obtain insurance for a customer owes the customer a legal duty to obtain same, and if the broker cannot do so, must notify the customer of his failure. In other words, a broker or agent who, with a view to compensation for his services, undertakes to procure insurance on the property of another, and who fails to do so, will be held liable for his failure to do so.

Not only is an agent or broker required to make a diligent effort in procuring an insurance policy but must procure a policy of the type requested by the insured. For example, if a customer requests a policy free of a particular type of exclusion and was negligent in failing to do so, the broker can be held liable. Even if the broker made a reasonable diligent effort to procure the insurance of the type request, the broker will still be liable if he fails to notify the insured of his inability to obtain insurance.

In a case we recently settled, our client had requested a blanket coverage policy, which would not include “per building” limitations or exceptions. Though the broker new of these specifications, they still marked and sold the policy to our client with disclosing or discussing these limitations. Not only did the broker fail to procure the requested policy, but the policy obtained was materially deficient in providing appropriate coverage. Furthermore, the broker failed to disclose that the policy obtained was not the one requested and did not provide adequate coverage.

Duty to Keep Insured Informed: Texas courts have held that an agent or broker has a duty to keep clients informed, so they can remain safely insured. While this duty most commonly applies to informing an insured of a non-renewal, lapse, or cancellation of insurance, the duty to inform is also a crucial part of the duty to procure. The basis for imposing liability when a broker fails to procure a policy of the type requested and fails to inform the insured is that the broker induced the insured to rely upon his promise to procure the insurance. Therefore, the insured reasonably assumed that he was insured and had coverage to his specifications, when in reality he wasn’t covered against the cause which caused his loss. An agent or broker must also inform clients as to the progress of the application, particularly where a client could have avoided a risk until coverage was secured.

Duty In Selection of Company: Texas courts have recognized that a broker has a duty to exercise care in the selection of an insurance company. If a broker knows or should have known of facts or circumstances surround an insurance company that could adversely affect the security of the coverage and did not take reasonable steps to protect the insured, the broker may be held liable. The broker should check an insurer’s rating with services such as the National Association of Insurance Commissioners’ Report, or Best’s Insurance Report, to avoid placing coverage with an insurer that has received many complaints. We have seen many cases where a broker or agent has agreements with certain carriers, and fails to make a diligent effort to qualified insurance carriers, so that they can place policyholders with their pre-selected insurance carriers in return for compensation even if it is not in the policyholders best interest.

Duty to Acquaint Oneself with Insured’s Business: An insurance agent was considered negligent based on the agent’s admitted ignorance of the insured’s business. The duty on the part of the agent or broker to acquaint him or herself with the insured’s business is to avoid procuring a policy with certain exclusions or limitations that would place the insured outside of coverage.