Acquisition of the Policy

A Video Explaining How to Acquire a Policy of InsuranceShow more

The person buying insurance may only acquire insurance from an insurer by one of three methods:

By Meeting With An Agent of The Insurer

The agent is a person appointed by the insurer to transact insurance business with and on behalf of the insurer. The agent usually has the right to bind insurance in the name of the insurer without first obtaining permission from the insurer. The prospective insured presents his or her needs to the agent who will either accept or reject the proposed insurance. If accepted, the prospective insured is immediately an insured of the insurer.

California Insurance Code Section 31 defines insurance agent as “Insurance agent” means a person authorized, by and on behalf of an insurer, to transact all classes of insurance other than life, disability, or health insurance, on behalf of an admitted insurance company.”

By Dealing With A Broker

An insurance broker is a person who transacts insurance with, but not on behalf of, an insurer. The broker’s only duty is to the prospective insured, so he or she shops for the broadest coverage available at the lowest possible price. The broker cannot bind an insurer without first obtaining a commitment in writing to insure the potential insured.

California Insurance Code Section 33 defines the term as follows: “’Insurance broker’ means a person who, for compensation and on behalf of another person, transacts insurance other than life, disability, or health with, but not on behalf of, an insurer.”

Through A Direct Writer.

Some insurers, known as direct writers, refuse to deal with agents or brokers. They will accept proposals for insurance directly from a prospective insured who will speak—usually by telephone—with an employee of the insurer who has the authority to accept a particular risk.

The agent is compensated solely by a commission from the insurer. The broker is usually compensated by a commission from the insurer plus a fee charged to the client policyholder, insurance applicant or insured.

The direct writer pays a salary to the person who meets (usually by telephone) with a prospective insured and can accept certain risks directly or with the permission of the insurer’s underwriting department.

In simple language the agent transacts insurance with a prospective insured on behalf of an insurer while the broker transacts insurance with but not on behalf of an insurer and only represents the prospective insured.

In Superior Dispatch, Inc. v. Insurance Corp. of New York, 181 Cal. App. 4th 175 (2010), the California Court of Appeal concluded that:

Representations in an insurance application prepared by an insurance broker on behalf of an insured are attributed to the insured as a matter of law. (LA Sound USA, Inc. v. St. Paul Fire & Marine Ins. Co. (2007) 156 Cal.App.4th 1259, 1268.)

Insureds are, therefore, accountable for all statements made on their behalf by brokers who are their agents as opposed to agents of insurers. When a broker prepares an application for insurance, therefore, it is imperative for the prospective insured to carefully review the application to verify the accuracy of the statements made in it. Otherwise, insureds face the possibility that insurers may attempt to void coverage if there is a misrepresentation or concealment of a material fact made by the broker. On the other hand, information known to an agent – even if not transmitted to the insurer – is considered to be known to the insurer.

The Underwriter

The person who makes the decision to insure or not insure a prospective insured, in modern practice, is called an underwriter. Unlike the original underwriters at Lloyd’s who invested his or her own money in the policy of insurance, the person with the title “underwriter” in modern American insurance, is usually an employee of an insurer who was employed to evaluate risks the insurer employer is willing to take.

The agent or broker deals directly with the insurer’s underwriter or an agent appointed by the insurer to act as its underwriter. The agent and broker try to present the risk to the insurer and underwriter best suited for the risk.

The underwriter is the risk taker. At Lloyd’s the underwriter risks his or her own funds. In modern insurance company practice the underwriter is the person who risks the funds of the insurer for whom he or she works.

The Loss Prevention Engineer

If the risk the prospective insured proposes is large, he or she will often be visited by a loss prevention engineer.

The Pre-Risk Inspection Service

ZALMA OPINION
The key to analyzing every claim presented to an insurer requires an analysis of the acquisition of the insurance policy, the representations made by the insurer to obtain the policy and the insurance that was agreed to by the insurer.

© 2021 – Barry Zalma