Insurance Broker

An insurance broker is an agent with the limited authority to find an insurer willing to accept a transfer of the principal's risk. Notice that in this situation the broker is the agent of the insurance applicant, not the insurance company. The broker's principal is the applicant. This is an important detail. If an insured informs the company's agent of all facts material to the risk to be transferred, the insured has simultaneously informed the insurance company. Under the law, the insured cannot be found guilty of concealment of material facts in this instance. Assume, however, that some insured’s inform only their own representative, the insurance broker, of all material facts. Suppose neither the insured nor the broker passes along all the facts to the insurer. Then a possibility exists that the insurance contract will be voided because of concealment of material facts. Because of this legal technicality, it makes a difference if the consumer is dealing with an agent or a broker.

This conclusion does not always apply, In one court case involving the relationship among the insured party, the insurance company, and the company's broker, an Illinois appellate court stated that although ordinarily the insurance broker is the insured's agent, by reason of the insurance company's past practices and custom, timely notice of a claim given by the insured to the insurance broker constituted timely notice to the insurer. The court felt that because the insurer used the broker as an intermediary for practically all aspects of the transaction, it was unfair to deny the broker was acting as the insurer's agent for the purpose of giving notice of loss.

Brokers cannot bind insurers to contracts. some broker's simultaneously are licensed as agents, and in their capacity as agents may have binding authority from a particular insurer. Because of the possible confusion, a few states have outlawed the legal distinction of broker, designating all such relationships as agency relationships.

The rules governing a broker's duties to a principal are the same as those presented earlier. The possibility of breach of the duty of loyalty no conflict of interest or no self dealing at the principal's expense can be a sensitive subject, however. The broker earns a commission as a percentage of the premium charged the principal (insured) by the insurer. If the broker approached two insurers charging different prices, and if all other factors were the same, such as the services offered by the insurers, the principal's best interest would be served by the lower cost insurer, whereas the broker's interest would best be met by the higher cost insurer. Several different factors encourage the broker to put the client's interest first, including the broker's own integrity and desire to do a good job, the desire to maintain a good reputation, and the possibility of being sued for malpractice, fraud, or breach of duty if the truth is exposed.

Insurance brokers are especially useful in commercial insurance. Business firms often have unique property or liability exposures or require insurance contracts written to their specifications. In these cases, the broker can help write the specifications for the insurance, or even design the insurance program and then find an insurer willing to provide the coverage. Business firms often employ brokers when insuring their employee benefit plans, such as their group life and health insurance. Most individual needs for insurance can be met with standard coverage and do not require a broker's service. In cases of people with poor driving records or substandard health, however, a broker may be required to find an insurer willing to accept the exposure. Because brokers shop for insurance on a daily basis they have information about pricing and coverage availability unknown to business firms that only shop for insurance annually.