When a business purchases its insurance through a broker, and a coverage dispute arises between the insured and the insurer, the broker may play a significant role in the case. Brokers may be called to serve as witnesses or, in some situations, may be named as defendants in actions brought by either the insurer or the insured. A question may arise over whether the broker is an agent of the insured, the insurer or both, and the outcome of the dispute may hinge on this determination. Courts will look at the totality of facts and circumstances to ascertain a broker’s agency status.
How Is the Term “Insurance Broker” Defined?
An insurance broker is an independent middleman who is not tied to a particular insurance company. Brokers are typically contacted by larger companies to compare various insurance products on the market and to procure insurance for them at the most favorable terms. By contrast, an insurance agent is tied to a particular company. It’s important to note that just because a broker is called a “broker” does not mean that the broker cannot be found to have an agency relationship to either the insured or the insurer.
A Broker Is Often Considered an Agent of the Insured
Generally speaking, brokers are primarily considered the agent of the party that first employs them. When a broker is hired to procure insurance for a business, the broker will often be considered an agent for that business entity, absent special conditions or circumstances. Therefore, most independent insurance brokers are generally found by courts to be agents of the insureds for whom they procure coverage.
When Is a Broker Considered an Agent of the Insurer?
Sometimes, courts will consider a broker to be acting as an agent of the insurance company. For instance, a broker may be the agent of the insurer for the purpose of collecting the insurance premium or delivering the policy; this agency relationship typically terminates once the action is completed. A broker may also be considered an agent of the insurer if the broker is affiliated with the insurer or has some degree of underwriting authority. As one court stated, a “broker authorized by the insurer to solicit business, negotiate, and execute contracts on an insurer’s behalf is an agent of the insurer.” 1 Even when there is no formal agency relationship between the broker and the insurer, the court may hold that the broker acted on behalf of and therefore served as an agent of the insurer based on “apparent authority.” One court held that “the broker’s agreement with insured to extend coverage was made with apparent authority and made the broker the agent of the insurer.” 2 Similarly, another court found that “facts developed at trial demonstrated that broker had apparent, if not actual, authority to bind the insurer.” 3
Brokers Can Be Dual Agents
A broker may act as the agent of both the insurer and the insured. As one court stated, the broker “may be the agent for insured, although as to the procuring of the insurance he also represents the company. Whether in a particular case or particular matter one acts as agent for the company or for insured depends upon the intention of the parties.” 4 Over the course of a transaction, the broker’s agency status may change so that the broker represents the insured during some phases and the insurer during others. According to one court, “There are special circumstances that allow a broker to be an agent for both the insured and the insurer when the broker is procuring insurance.” 5 Another court concluded that even if an insurance broker is an agent for the policyholder, “the broker could also act as the insurer’s agent so long as the dual agency does not involve any conflict of interest.” 6
Statutes Can Impact a Broker’s Agency Status
While a broker’s agency status is typically determined by a fact-based analysis, in some situations it is based on federal or state statutory provisions. For instance, “under Ohio law…anyone who solicits a life insurance application is the agent of the insurer in a controversy between the insured and the insurer. 7 The court in another case cited a federal statute in holding that a broker who obtains insurance from FEMA “is the agent or broker of the insured and is not an agent of the Federal Government nor any Federal agency.” 8
Why a Broker’s Agency Status Matters
A broker’s agency status has implications for many aspects of an insurance coverage dispute and, in some cases, can affect the dispute’s outcome. Therefore, when a question arises over agency status, courts will carefully scrutinize the facts and circumstances of the broker’s particular relationship with the insurer and the insured, along with any relevant statutes, to make a largely factual determination. We will explore the legal consequences of a broker’s agency status in greater detail in a future article.
If you are involved in a dispute with your business insurance company, contact us. We have the expertise, experience and tenacity to make insurance companies keep their promises to you and your business.
1 O’Riordan v. Federal Kemper Life Assur. Co., No. CO 37789 (Cal. Ct. App. Mar. 17, 2003)
2 In Schimmel Fur Co. v. American Indem. Co., 440 S.W.2d 932, 938 (Mo. 1969)
3 Sands v. Granite Mut. Ins. Co., 232 Pa. Super. 70, 77, 331 A.2d 711, 715 (1974)
4 Diplomat Homes, Inc. v. Commercial Standard Insurance Co., 394 F. Supp. 558, 564-65 (W.D. Mo. 1975)
5 Mark Andy, Inc. v. Hartford Fire Ins. Co., 229 F.3d 710, 717 (8th Cir. 2000)
6 Guardian Life Ins. Co. of Am. v. Chemical Bank, 94 N.Y.2d 418, 422-23, 727 N.E.2d 111, 115, 705 N.Y.S.2d 553, 557 (2000)
7 New Jersey Life Ins. Co. v. Getz, 622 F.2d 198, 199, 201 (6th Cir. 1980)
8 Carega Serv. Station Corp. v. Federal Emergency Mgmt. Agency, 558 F. Supp. 45, 47 (S.D. Fla. 1983)