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What To Do When Your Broker Drops The Ball

By Andrew M. Reidy, Stephen M. Goldman and Stacey A. Feldman

When corporate policyholders go into the marketplace to procure insurance, brokers are generally involved. The broker often plays a key role in negotiating the extent of the coverage, assisting in selecting an insurance company to write the coverage, collecting the premiums, and notifying the insurance company of claims and losses.

A broker is required to act with reasonable care in performing its duties and may be found liable for a breach of its duties. If the broker “drops the ball,” the policyholder may have recourse against the broker.

Defining The Role of The Broker

At the outset, policyholders should understand the broker’s role. A policyholder should insist upon a written agreement with the broker that describes the services the broker will perform and specifically defines whether the broker has the authority to bind the policyholder and, if so, under what circumstances.

As a part of its initial discussions with a broker, a policyholder should clarify the broker’s payment arrangements. On occasion, a policyholder pays a broker a set fee for its services. Other times, the broker is paid on commission, directly from the insurance company. Sometimes brokers receive both fees and commissions. Separate and apart from payment rendered regarding a particular policyholder’s coverage, many brokers have “profit-sharing” arrangements with insurance companies. Under these arrangements, brokers receive payments during the year as incentive compensation if the broker places a sufficient volume of business with the carrier. Obviously, this is an important fact to know because the broker frequently plays the key role in selecting the carrier. Before starting to work with a broker, a policyholder should find out where his or her loyalty lies.

Understanding Whom A Broker Represents

A broker’s potential liability frequently is affected by whether the broker is the agent of the policyholder or the insurance company or both. Insurance companies usually assert that “the broker is the policyholder’s agent.” However, determining whose agent the broker is depends upon the factual circumstances of the relevant relationships. The following factors are among those that courts consider in determining whom the broker represents: (1) existence of a written contract detailing the broker’s duties and scope of authority; (2) whether the broker had direct contact with the policyholder and/or the insurer; (3) how and by whom the broker was compensated for its duties; (4) possible applicability of state statutes on broker designation; (5) whose interests the broker was attempting to protect; (6) whether the insurance company’s website lists the broker as a registered agent; and (7) whether the broker is a state registered agent for the insurance company. 

ABOUT THE AUTHORS

Andrew M. Reidy is a Partner, Stephen M. Goldman is Of Counsel, and Stacey A. Feldman is an Associate in the Insurance Recovery Group of McKenna & Cuneo, L.L.P., where they represent policyholders in a wide range of insurance coverage cases. The opinions expressed in this Paper do not necessarily express the views of McKenna & Cuneo, L.L.P. or its clients. The Paper is intended to provide information, and does not provide legal advice. Mr. Reidy presented an extended version of this paper at the 2001 RIMS Conference in Atlanta, Georgia in May.

riskVue | The webzine for risk management professionals
August 2001