Life
The Concept of Insurance
Insurance is a legal contract that transfers an uncertain risk from one party to another. The insured transfers the possibility of suffering a large financial loss to an insurer in return for paying a relatively small, contractually defined premium.
An insurance policy restores an insured to the financial position she experienced before an insured loss. Insurance companies indemnify their insureds when covered losses occur.
Types of Insurance Companies
Stock Companies – Nonparticipating
Stockholders own a stock company.
Stockholders share in company profits, and, if these insurers declare stock dividends, they’re taxable.
Stock insurers issue nonparticipating insurance policies because policy owners are not stockholders and, therefore, are not owners.
Mutual Companies – Participating
The policy holders own mutual insurance companies.
Mutual insurance companies sell “participating policies” because policy owners receive a share of surplus revenue in the form of policy dividends.
The revenue paid out in the form of policy dividends is referred to as the divisible surplus.
In the aggregate, policy dividends represent a refund of excess premium or that portion of premium remaining after a company has set aside the necessary reserves.
Assessment Mutual Insurers
To pay for claims, assessment mutual insurance companies assess premiums at the time members experience losses.
Pure assessment mutual companies charge no premium in advance.
Advance premium assessment insurers levy assessments if the premium is insufficient.
Fraternal Benefit Societies
Fraternal societies are not-for-profit organizations that are noted for their social, charitable, and benevolent activities.
Fraternal membership is based on a common bond, and these organizations may form around a common religion, nationality, ethnicity, charitable cause, or other affiliation.
The three defining characteristics of a fraternal organization are as follows:
It’s non-profit.
It has a lodge system, including ritualistic work and a representative form of government.
It was not formed simply to provide insurance
Reciprocal Insurers
Each policy owner individually assumes a share of another’s risk, which makes reciprocal insurance contracts a form of risk sharing rather than risk transfer.
Policy holders receive policy dividends, and they own a share of the company surplus, which they can receive upon terminating their membership.
An attorney-in-fact is appointed to handle transactions for the reciprocal insurer.
Risk Retention Groups (RRGs)
A risk retention group (RRG) is a specialized insurance company that provides liability insurance for individuals and entities with a common bond.
Risk retention groups retain risks (risk retention) and process claims.
Risk Purchasing Groups (RPGs)
A risk purchasing group (RPG) buys coverage for its members, which must have a common bond.
The risk purchasing group becomes a master policy holder, and its members receive certificates of insurance.
Reinsurers
Reinsurers provide insurance for other insurance companies.
The reinsurer assumes risk from a ceding insurer, which is also referred to as the primary insurer.
Primary insurance companies purchase reinsurance when they underwrite large risks that could result in claims exceeding the primary carrier’s risk retention limit. The risk retention limit is the maximum amount of exposure that the insurer can carry when insuring a single risk.
Treaty reinsurance exists when a reinsurer enters into a contract with a primary insurance company to automatically assume its excess exposure for risks that meet contractually defined criteria. This agreement is also referred to as automatic reinsurance.
When a primary insurer seeks reinsurance for a specific exposure without an ongoing agreement, it’s referred to as facultative reinsurance.
A captive insurer is established to cover the loss exposure of the parent organization that owns it.
Surplus Lines Insurance Carriers are unauthorized insurers that provide coverage when authorized insurers reject buyers or authorized insurers don’t offer the type of insurance being sought.
Lloyd’s of London is a syndicate of individuals that individually underwrite special (unique) risks.
Self-Insurers establish a self-funded plan to cover potential losses and often cap potential losses with a stop-loss insurance policy. “Self-insurance” does NOT EQUAL “no insurance.”
Insurers Classified by Authorization
An authorized or admitted insurer describes an insurer that has been issued a certificate of authority from a state's insurance department authorizing the insurer to transact insurance in that state. Insurers must receive a certificate of authority from each state they wish to transact insurance.
An unauthorized (non-admitted) insurance company is prohibited from conducting insurance operations in that particular state.
Insurer Classified According To Domicile
A domestic insurer is organized and incorporated in the state in which it’s writing business.
A foreign insurer is organized under the laws of a different state.
An alien insurer is organized under the laws of a different nation.
Departments within an Insurance Company
The marketing or sales division prospects for new business.
The sales department meets with clients face-to-face and completes applications.
The underwriting department reviews applications, selects risks to insure, and assigns risk classifications.
The claims department administers claims.
The actuarial department calculates policy parameters, such as risks and costs relative to promised benefits.
Key People Within an Insurance Company
Producers
The term “Producer” describes an individual or organization that is licensed by a state to solicit, sell, or transact insurance in that state.
Licensed producers have a fiduciary responsibility to the companies they represent and the consumers they serve.
The terms “agent” and “broker” are used throughout the insurance industry to describe the legal relationship between a producer, an insurer, and a consumer.
Agents, represent one or more insurers under the terms of an appointment contract, which gives them limited authority to make binding commitments on the insurer’s behalf.
Brokers, represent themselves and the insured. The state licenses brokers, but they are not appointed by the insurer whose product is being considered by a consumer. Brokers cannot bind the insurer.
Underwriters
Underwriters identify, examine, assess, and classify loss exposures.
Underwriters approve or decline applications and determine the cost of insurance.
Actuaries calculate policy rates, reserves, and dividends.
Adjusters investigate and settle claims.
How Insurance is Sold
Most insurance purchased in the United States is sold through licensed insurance producers. Typically, these producers are agents who are appointed to represent one or more insurance companies.
Agents represent the insurer during a sales transaction and can bind insurance. In other words, they can commit the insurers that they represent to cover a risk exposure—at least temporarily.
Career Agency System
Major insurers (including direct writers) often establish career agencies, which recruit and train new agents. The agency is often a branch of a significant stock or mutual insurance company.
Some career agencies are contracted to represent an insurer in a specific geographical area or market.
A general agent typically runs a career agency.
The managerial system features career agencies that are run by a salaried branch manager.
Personal Producing General Agency System
The personal producing general agency (PPGA) system is affiliated with one or more insurers, but a PPGA doesn’t recruit, train, or supervise career agents. Instead, a PPGA focuses on sales in its assigned market or territory.
PPGAs generally maintain their own offices and staff. The staff consists of employees of the PPGA rather than of the appointing insurer.
Independent Agency System
Independent agents represent any number of insurance companies through contractual agreements.
Other Methods of Selling Insurance
Insurance companies also sell coverage using mass marketing methods that expose their products to large groups of consumers, with occasional follow-up by agents.
Insurance companies that use these methods deal directly with consumers.
Direct sellers use vending machines, advertisements, or salaried producers.
Evolution of Industry Oversight
Federal Court Cases and Legislation Affecting Insurance Industry Regulation
Paul v. Virginia (1868): The United States Supreme Court ruled that insurance is not interstate commerce, thereby upholding the states’ right to regulate it.
The United States v. Southeastern Underwriters Association (SEU) (1944): The United States Supreme Court reversed Paul v. Virginia and ruled that insurance is a form of interstate commerce and is subject to federal regulation.
The McCarran-Ferguson Act(1945): Congress responded to the SEU decision by delegating the regulation of insurance to the states while requiring compliance with federal antitrust standards – either directly or through comparable state laws. McCarran-Ferguson (also referred to a Public Law 15) also levied a maximum penalty of up to one year in jail and a fine of $10,000 for violators.
The Fair Credit Reporting Act (1970): This Act was established to protect privacy by requiring the fair and accurate reporting of consumer information.
Amendments to USC 1033 and 1034 regarding Fraud and False Statements (1994): This section of the United States Code (USC) prohibits felons (those guilty of crimes involving dishonesty or breach of trust) from participating in the insurance industry without a “Letter of Written Consent” from their state insurance regulator. Any person who engages in intentionally unfair or deceptive insurance practices is subject to a fine of up to $50,000, 15 years in prison, and license revocation.
The Financial Services Modernization Act (1999): This Act allowed banks to sell insurance and prompted states to create regulations for insurance companies to protect the privacy of consumer personal information.
The USA PATRIOT Act (2001): This Act focuses on the funding sources for terrorists and international money laundering in general.
The Do Not Call Implementation Act (2003) implemented the Do Not Call Registry, which allows consumers to opt-out of receiving calls from telemarketers, except for those on behalf of charities, political organizations, and surveys.
2003-CAN-SPAM Act: This Act outlines the right for consumers to request a business to stop sending emails, the requirements for businesses to honor such requests, and the penalties incurred for those who violate the Act. The Act does not apply to transactional and relationship messages.
National Association of Insurance Commissioners (NAIC)
The National Association of Insurance Commissioners (NAIC) is an industry association of state insurance regulators focused on establishing model acts and regulations that provide a common framework for state officials to address industry-wide issues. These regulatory models help streamline the legislative and administrative processes while encouraging uniform standards.
The NAIC lists four objectives: (1) To encourage regulatory uniformity among the states. (2) To promote efficient regulatory administration. (3) To protect policy owners and consumer interests. (4) To preserve state regulation of the insurance industry.
The NAIC’s Model Advertising Code labels certain words and phrases as inherently misleading and bans their use.
NAIC Unfair Trade Practices Act (Model) Act gives a state insurance department the power to:
Investigate insurance companies and producers.
Issue cease and desist orders.
Impose penalties.
Seek a court injunction to restrain unfair activities.
The National Conference of Insurance Legislators (NCOIL) is an association of state legislators that serves on insurance and financial institutions committees to educate policymakers and preserve state regulation. NCOIL also writes model laws.
The National Association of Insurance and Financial Advisors (NAIFA) and The National Association of Health Underwriters (NAHU) created a Code of Ethics for agents.
Agent Marketing and Sales Practices standards include:
Selling to needs: Learning and addressing client needs
Suitability: Recommending products that address client needs and match client capabilities
Full and accurate disclosure of product information
Documentation of each client meeting and transaction
Client service after the sale
Rating Services describe companies that determine an insurer’s financial strength. These services publicize the financial health of insurers after analyzing company reserves and liquidity.
The Nature of Insurance
An insurance policy is the transfer of risk from one party to another in exchange for a fee (premium) using a legal contract.
Insurance companies take one person’s risk of loss and spread it among all parties who are participating in the insurer’s risk pool, as evidenced by the payment of premiums.
The “Principle of Indemnification” is financial. Any insurance contract that’s based on this principle intends to restore insureds to their original financial position after they suffer losses.
The same principle stipulates that insureds will not profit or gain from their loss. In other words, they will not receive more than they lost.
The amount needed to restore the insured’s financial status can be referred to as an indemnity. The act of restoring is considered indemnifying.
The ‘law of large numbers’ states that the greater the number of homogenous loss exposures, the more accurate the prediction of the aggregate risk within an insurance pool.
Adverse selection is the tendency for higher-than-average risks to seek out insurance more frequently than lower risks.
Perils, Loss, and Hazards
A peril is the immediate and specific cause of a loss.
Insurance policies that cover Specified or Named Perils will individually list the perils that they cover. If the peril that causes a loss is not listed, then the loss is not covered.
Insurance policies that use a Special or Open Peril definition of covered perils will cover losses that result from any cause (peril) which is not explicitly excluded in the policy.
A loss is an unintended (by the insured) loss of financial or monetary value.
The event that causes a loss is referred to as an Occurrence. An occurrence takes place at a specific time or place or develops over time before it makes itself known.
An accident is a type of occurrence but is unexpected and unintended. An accident happens at a specific time and place and causes a measurable loss.
Other occurrences such as illnesses, repetitive motion injuries, or exposure to toxins may cause an identifiable loss, but it’s not possible to determine the exact moment that the loss occurred.
A direct loss occurs when people are harmed, or a covered peril damages property.
An Indirect Loss or “Consequential Loss” results from a direct loss, such as the loss of revenue when a business shuts down to rebuild after a fire. Disability insurance also covers a consequential loss—the loss of income when a person cannot work because of an illness or injury (direct loss).
Loss exposure is the risk of a possible loss. Basically, any situation that presents the possibility of a loss. In some cases, the term is used to refer to a loss exposure unit.
Homogeneous exposure units are individual entities that are exposed to the same group of perils. Their similarities allow them to be grouped together so that the same actuarial assumptions can be applied when pricing coverage.
A hazard is a physical condition, a way of acting, or a way of thinking that increases the likelihood that a loss will occur.
Physical hazards are physical or tangible conditions that make a loss more likely to occur, such as the increased risk of disability if a person has chronic back problems.
Moral hazards make the loss more likely to occur due to the dishonest character of the insured or harmful acts that are done intentionally. Cigarette smoking is an example of a legal action that’s considered a moral hazard. Falsifying the circumstances of an automobile insurance claim to avoid paying a deductible or being held liable is both illegal and evidence of a moral hazard.
Morale hazards arise from a state of mind that’s indifferent to the possibility of loss because of the existence of insurance.
Risk
Risk is the uncertainty regarding the occurrence of a loss.
Speculative risks are not insurable as they result in financial gains as well as losses.
Pure risks are insurable because there’s only the potential for loss.
In general, insurable risk must include all of the following elements:
An insurable loss must be due to chance (accidental), which means the cause must be outside an insured’s control.
An insurable loss must be definite and measurable, which means the time, place, and amount are known.
An insurable loss must be predictable (calculable). There must be a sufficient number of homogeneous loss exposures.
An insurable loss cannot be catastrophic. If the potential loss is too large or unpredictable, an insurer cannot financially survive after paying a claim.
An insured consumer must have a substantial loss exposure to make the option of buying insurance economically reasonable.
The premium cost must be affordable.
The following are the three basic risk classifications:
Standard risks have an average potential for loss.
Substandard risks have a higher-than-average potential for loss.
Preferred risks have a lower-than-average potential for loss.
Risk managers analyze existing loss exposures and create programs that manage the risk using one or more of the following risk management tools:
Risk avoidance eliminates situations that expose a person to risk.
Risk reduction accepts the existence of a risk but takes actions to reduce the likelihood or severity of a loss.
Loss prevention is a form of risk reduction. The insured takes actions that eliminate damage or loss.
Risk retention occurs when a person accepts a degree of risk and creates a reserve to pay for it if needed.
Risk transfer is the practice of transferring risk from one party to another and is the basis of insurance.
Risk-sharing spreads risk among multiple parties that each assumes a portion of the covered losses.
Risk pooling spreads risk by distributing the anticipated cost of future losses among many individuals.
Risk pooling transfers the risk of loss from an individual to a group.
Reinsurance is a form of risk transfer between insurance companies.
The ceding primary insurer transfers excess risk (risk in excess of its retention limit for a single exposure) to a reinsurance carrier that assumes the risk after receiving a premium from the primary carrier.
KEYWORDS: LEGAL CONCEPTS OF INSURANCE
Prior to reading this chapter, please review the following keywords. An understanding of their basic definitions will improve your comprehension of the chapter content.
Adhesion: A contract of adhesion is one that has been prepared by one party (the insurance company) with no negotiation between the applicant and insurer. The applicant adheres to the contract terms on a “take it or leave it” basis when accepted. (See Rule Regarding Ambiguities)
Agent: This is the person who represents the insurer during an insurance transaction and has been authorized to act on the insurance company’s behalf. Agents have a fiduciary responsibility to both parties—the insurer and the policy owner.
Aleatory: This is a legal arrangement in which there’s the potential for an unequal exchange of value or consideration between both parties. The insured may never file a claim in an insurance contract, or a claim may be filed after only one or two premiums.
Ambiguities: This refers to terms or conditions that are not clearly defined in an insurance contract. (See Adhesion)
Apparent Authority: This is the appearance of the insurer providing the agent authority to perform unspecified tasks based on the agent-insurer relationship. This perception of authority must stem from the insurer’s actions, even if the perception is unintended and the perception is in error.
Broker: This is a licensed producer who represents himself and the insured (i.e., the client or customer) during an insurance transaction. However, a broker is different from an agent. A broker doesn’t hold an appointment with the insurer in question, and a broker cannot bind coverage on behalf of the insurer.
Competent Party: This is a person who’s able to understand the contract to which two parties are agreeing. All parties must be of legal competence, which means that they must be of legal age, mentally capable of understanding the contract terms, and not under the influence of drugs or alcohol.
Concealment: This is the failure of an applicant to disclose a known material fact when applying for insurance.
Conditional: This is an agreement that remains in force if certain conditions are met. The insurer’s promise to pay benefits is dependent on the occurrence of an event that’s covered by the contract.
Consideration: This is the legal description of the items of value that each party to the contract provides to the other. In the case of an insurance policy, the applicant provides material information and the premium. In return, the insurance company agrees to pay the cost of claims that are covered by the policy.
Consideration Clause: This clause is part of an insurance contract and sets forth the initial and renewal premiums and frequency of future payments.
Doctrine of Reasonable Expectations: This doctrine states that an insurance contract will be interpreted to mean what a reasonable individual would think it means, even if the insurer must pay additional benefits that are not intended by the contract.
Estoppel: This is the legal impediment to one party’s ability to deny the consequences of its own actions or deeds if such actions or deeds result in another party acting in a specific manner or if certain conclusions are drawn.
Express Authority: This is the explicit authority that’s granted to the agent by the insurer, as written in the agency contract.
Fiduciary: A fiduciary is a person to whom property or power is entrusted for the benefit of another person. A producer is a fiduciary that’s in a position of trust regarding the funds of its clients and the insurer. It’s the responsibility of an insurance producer to account for all of the premiums collected and to provide sound financial advice to clients.
Fraud: An individual commits fraud when he engages in intentional deceit to gain a benefit. Fraud includes having deliberate knowledge of false statements that are made or intended as well as the act of a person making such statements herself.
Implied Authority: This is an authority that’s not explicitly granted to the agent in the contract of agency, but which common sense dictates the agent has. This authority enables the agent to carry out routine responsibilities.
Indemnity Contract: This type of contract attempts to return the insured to his original financial position.
Insurable Interest: This is the financial, economic, and emotional impact that’s experienced by a person who suffers a covered loss. A person has an insurable interest if she has more to gain by not experiencing the loss.
Insurance Policy: This is a written contract in which one party promises to indemnify another against a loss that arises from an unknown event.
Legal Purpose: This means that an insurance contract must be legal in nature and not in opposition to public policy.
Material Misrepresentation: This is a false statement being made by an applicant that influences either an insurer’s decision to accept the risk, or the classification and pricing of a risk that’s accepted by the insurer.
Misrepresentation: This is a statement being made as a legal representation that’s factually incorrect, either totally or in part.
Parole Evidence Rule: This rule states that, when the parties agree in writing, all previous verbal statements come together. A written contract cannot be changed or modified by parole (oral) evidence.
Policy Rider or Endorsement: This is an amendment which is added to an insurance contract that overrides terms in the original policy. Riders may add or remove coverages, change deductibles, or revise any other policy feature. In general, a policy owner must pay an additional premium to add a policy rider that enhances policy benefits.
Reasonable Expectations: This indicates that the insured is entitled to coverage under a policy that any sensible and prudent person would expect it to provide.
Representations: These are statements made by the applicant that he considers true and accurate to the best of his belief.
Rule Regarding Ambiguities: This rule applies to contracts of adhesion. Courts will interpret the terms of an insurance contract in favor of the insured if there’s a legal dispute and the court holds the terms of the contract to be ambiguous. The insurer is responsible for ensuring that the contract is clear since it creates the policy terms as a contract of adhesion.
Subrogation: This is the right for an insurer to pursue a third party that caused an insurance loss to the insured.
Unilateral: This is a type of contract in which only one party—the insurer—makes any kind of enforceable promise. The promises remain in force for as long as the insured pays the required premium.
Utmost Good Faith: This statement is based on the belief that both the policy owner and the insurer must know all of the material facts and relevant information. As such, they will provide each other with all material facts and relevant information.
Valued Contract: This type of contract pays a stated sum regardless of the actual loss incurred. Life insurance contracts are valued contracts.
Void Contract: This contract is an agreement that has never really been in force because it lacks one of the essential elements of a contract. For example, if a third party (rather than the applicant for insurance) provides a urine sample for analysis, this act of impersonation deprives the insurer of the information it needs. In effect, the applicant is withholding necessary consideration; therefore, any policy is void from the day it’s issued. In other words, it never really goes into effect. (See Voidable Contract for contrast.)
Voidable Contract: This type of contract is an agreement that may be set aside by one of the parties in the contract for a reason that’s satisfactory to the court. (See Void Contract for contrast.)
Waiver: This is the voluntary giving up of a legal, given right.
Warranty: This is a statement made by the applicant that’s guaranteed to be true in every respect and also becomes a part of the contract. The discovery that a warranty is untrue can be grounds for revoking the agreement. In general, all statements that are made by an applicant are representations, rather than warrantie
General Law of Contracts
Insurance contracts are binding legal agreements between two parties—the policy owner and the insurer.
If offered a choice of parties contracting with an insurer, choose the policy owner rather than the insured.
The only time “insured” is the correct answer is when “policy owner” (or “policy holder”) is not given as a possible answer.
The beneficiary is not a party to the contract.
The Four Essential Elements of Every Contract (C.L.O.C.)
Competent Parties
The parties to a contract must be legally competent, which means mature, mentally sound, and sober.
State law may bar certain other categories of individuals (unlikely to be tested).
Legal Purpose
The object of the contract and the reason for the parties to enter into an agreement must be legal.
Offer and Acceptance (Agreement)
Both parties must agree to the contract terms. The first party to ratify the contract terms makes an offer, while the second party to ratify the terms provides her acceptance.
OFFER + ACCEPTANCE = AGREEMENT
Consideration
For an agreement to be binding, each party must provide the other with some item of value or “consideration.”
An insurance applicant provides the premium and information on the completed application.
The insurer promises to pay legitimate claims.
Special Features of Insurance Contracts
An insurance contract is an aleatory contract because one party may recover more in value than she has paid.
The value of the policy owner’s potential benefit (i.e., claim payment) is generally higher than the value (i.e., premium) that’s received by the insurer.
There’s no guarantee that the insured will receive a benefit. Performance is based on an uncertain future event involving unequal bargaining value.
Insurance policies are contracts of adhesion because they’re prepared by only one of the parties—the insurance company and offered on a “take it or leave it” basis.
When the terms in a contract of adhesion are ambiguous (unclear), courts rule in favor of the party that did NOT create the contract (i.e., the insured).
The doctrine of reasonable expectations interprets contract terms that may be interpreted more than one way by ascertaining what a “reasonable” consumer would interpret them to mean.
Insurance policies are unilateral contracts because only one party (the insurer) makes an enforceable promise, which is contingent on the policy owner paying the premium.
Most forms of insurance are personal contracts because they’re non-transferable, and they insure named individuals as owners, potential defendants (torts), or healthcare consumers.
Life insurance is an exception to this rule. Life insurance is NOT a personal contract since it can be borrowed against or sold like a transferable asset.
Insurance policies are conditional because the insurer’s promise to pay is contingent on the occurrence of uncertain future events. It also requires the insured or beneficiary to take certain actions.
Valued contracts pay a stated sum regardless of the actual loss that’s incurred.
Indemnity contracts pay an amount that’s equal to a loss identified in the policy.
To have “an insurable interest” in oneself or another person, an individual must have a reasonable expectation of benefiting from the other person’s continued life, and conversely, will suffer a financial loss if the insured party becomes ill, is injured, or dies.
Insurable interest must exist at the time of application but does not need to exist at the time of a claim payment (i.e., the death of the insured).
Negotiating and Issuing Insurance Policies
Utmost good faith means that the policy owner and the insurer disclose material information.
Reasonable expectations are the basis for interpreting ambiguous contract terms.
A warranty is a statement that’s guaranteed to be true in every respect and becomes a part of the contract.
A representation is a statement made by the applicant which he considers to be true and accurate to the best of his belief. Statements made on an insurance application by the applicant are considered to representations.
Concealment is defined as the failure or neglect by the applicant to disclose a known material fact.
A void contract is one that has never really gone into effect because it lacks one of the four essential elements of a contract.
A voidable contract is an in-force agreement that may be terminated because one of the parties violates a condition of the policy.
Fraud is an intentional misrepresentation regarding a claim or policy application that a consumer makes to obtain benefit payments or policy coverage under false pretenses.
The parole evidence rule limits a contract to its written terms.
A waiver is the voluntary surrendering (giving up) of a known right.
Estoppel requires an insurer to abide by misleading or incorrect statements that are made by one of its agents, even if it can demonstrate that the governing policy form contradicts the agent.
Estoppel applies when ALL of the following elements are present:
An agent is acting within their authority.
The agent makes an inaccurate representation on behalf of the insurance company.
A consumer relies on the information being correct.
When a circumstance arises that tests the validity of the questionable representation, the insurance company refuses to honor the agent’s words.
The insurer’s decision causes financial harm to the consumer.
The Law of Agency
The insurer is considered the principal of an agent contract.
Acts of an agent are considered acts of the principal.
Payments received by an agent are received by the principal.
If an agent knows something, the principal (insurer) knows it as well.
Express authority is the agent’s authority expressly granted in his agency contract.
Implied authority is the ancillary authority which is assumed that an agent needs to carry out the tasks covered by the express authority conferred by his agent’s contract.
Apparent authority is the appearance of authority based on the actions, words, or deeds of the principal. It can exist even if no written agreement exists.
Insurance producers may be agents or brokers.
Agents are appointed by insurers, represent insurers, and can bind coverage on their behalf.
Brokers represent the consumer and cannot bind coverage.
Some states license solicitors and provide them with the authority to seek out insurance applicants and arrange for prospective clients to meet with a licensed agent.
An agent is a fiduciary because they hold a position of financial trust and confidence with both consumers and insurers.
Other Legal Concepts Related to Insurance
Subrogation is an insurer’s right to pursue liable third parties for amounts that are paid out in claims made by the insured.
Torts are private wrongs which mostly involve negligence and are adjudicated in civil court. Civil courts also decide cases involving contract law.
Insurance agents need errors and omissions (E&O) liability insurance, which covers injuries resulting from mistakes that are made rendering or failing to render professional services.