Producer Roles and Receipt Types
Producers’ responsibilities
Producers have responsibilities to both the insurer and the insured. Under the law of agency, they have the financial responsibility of collecting premiums and submitting them to the company.
A producer also has a duty to act with the level of care a reasonable person would use under similar circumstances. This is often called the “prudent person” rule, and it helps protect both the insurer and the insured from unreasonable insurance transactions.
Producers are also entrusted with a fiduciary responsibility. A fiduciary is someone who has been given another party’s financial trust. Property and casualty producers, for example, may handle client funds and help manage clients’ general insurance needs.
Because producers act in a fiduciary capacity, premiums collected from applicants are held for the insurer and are not the producer’s own money. State laws commonly require these premiums to be kept in a trust account separate from the producer’s personal or business funds until the money is remitted to the insurer. The account rules vary by state.
Producers help clients identify and evaluate insurance needs by:
- Gathering pertinent financial data, most of which will be confidential in nature
- Establishing financial goals and objectives
- Making fair and complete comparisons of differing policies that may be appropriate and recommending policies that best meet the needs of the client
- Explaining policy provisions to the client
- Taking an application after determining that the prospect represents an insurable risk
- Submitting applications and premiums promptly to the insurer
- Periodically reviewing all of the client’s policies so that any necessary changes can be made
- Promptly delivering policies to the client and explaining the nature and purpose of their provisions, riders, exclusions, and ratings
Types of receipt
When an agent or broker accepts an initial premium deposit with the application, the applicant is given a receipt. The type of receipt matters because it can affect how claims are handled if a loss occurs while the application is still in underwriting.
Binding receipt
A binding receipt is the riskiest type from the insurer’s viewpoint. When a producer gives a binding receipt, the company is bound to the terms of the binder (a temporary insurance contract).
For example, an agent gives a binding receipt to an applicant for a $100,000 property insurance policy. Later, underwriting determines the applicant is uninsurable. However, during the 4 weeks it takes to complete underwriting, the applicant’s building burns down. In this situation, the insurer is still bound to provide coverage under the binder and must pay the claim.
P&C binders provide immediate coverage regardless of later underwriting decisions.
Conditional receipt
Conditional receipts are generally used only in life and health insurance, not in property and casualty lines.
P&C producers do not issue conditional receipts because coverage is either:
- bound immediately through a binder, or
- deferred until the policy is issued.
There is no “insurability” condition before coverage in P&C.
Lesson summary
Producers’ responsibilities include collecting premiums, acting according to the prudent person rule, and meeting fiduciary duties. They help clients identify insurance needs, compare policies, explain provisions, take applications, and submit applications and premiums promptly to the insurer.
Types of receipts include:
- Binding receipt (binder): Provides immediate, temporary coverage from the date of binding. The insurer is fully bound to honor claims that occur during the binder period.
- Conditional receipt: Not used in property and casualty insurance. Coverage is either bound immediately or deferred until the policy is issued.
A binder is in force once a producer with binding authority binds coverage. It does not depend on the premium being paid first. If coverage is not bound, coverage is deferred until the policy is issued.