Producer Roles and Receipt Types

Producers’ Responsibilities

Producers have certain responsibilities to the insurer and the insured. Under the law of agency, they have the financial responsibility of collecting premiums and submitting them to the company. An agent has a duty to act with a degree of care that a reasonable person would exercise under similar circumstances. This “prudent person” rule is to protect the insurer and the insured from unreasonable insurance transactions on the part of the agent.

Producers are also entrusted with a fiduciary responsibility. A fiduciary is anyone in whom another party has placed its financial trust. Life and health producers are entrusted with the handling of funds and the general insurance needs of clients. Producers are responsible for assisting clients in identifying and evaluating their 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 given can be very important in the settlement decision of any claims that may arise during underwriting.

Binding Receipt

A binding receipt is the most restrictive from the insurer’s viewpoint. When an agent gives a binding receipt, the company is bound to the terms of the contract being applied for. For example, an agent gives a binding receipt to an applicant for a $100,000 life insurance policy, and it turns out that the applicant is uninsurable, but in the 4 weeks that it takes for the application to move through the underwriting process, the applicant dies. In this example, the insurer is bound to the terms of the contract and must pay the beneficiary $100,000.

Conditional Receipt

This receipt still binds the insurer to the terms of the contract in the event that the applicant dies before the underwriting is complete, but only if the company finds that the applicant was insurable. If the applicant were found to be uninsurable, the premium paid with the application would be returned to the applicant’s estate.

Sidenote

Know this...

For binding or conditional receipt to exist, offer and consideration must be in place. That is, the producer must receive the application for insurance and the initial premium. If the applicant does not pay the initial premium at time of application, no coverage is in force during underwriting and the insurer may require a statement of continued good health at policy delivery.

Lesson Summary

Producers’ responsibilities include collecting premiums, acting prudently, and fulfilling fiduciary duties. They assist in identifying insurance needs, comparing policies, explaining provisions, taking applications, and promptly submitting them to the insurer.

Types of receipts include:

Binding Receipt: The most restrictive as the insurer is bound to the contract terms being applied for.
Conditional Receipt: Binds the insurer if the applicant is found to be insurable; otherwise, the premium is returned.

For both types of receipts to exist, the producer must receive the application and initial premium. If no initial premium is paid, the insurer may require a statement of continued good health at policy delivery.

Chapter Vocabulary

Definitions

Binder (Binding Receipt): A temporary policy. A receipt that provides that if the premium accompanies the application, the coverage is in force from the date of application (whether the policy has yet been issued or not)
Conditional Receipt: A receipt that provides that if the premium accompanies the application, the coverage is in force from the date of application (whether the policy has yet been issued or not), provided the insurer would have issued the coverage on the basis of facts as revealed by the application and other usual sources of underwriting information.
Fiduciary: A person holding the funds or property of another in a position of trust, and who is obligated to act in a prudent and ethical manner. Examples are attorney, bank trustee, or executor of an estate.
Fraud: Intentional lying or concealment by policyholders to obtain payment of an insurance claim that would otherwise not be paid, or lying or misrepresentation by the insurance company managers, employees, agents, and brokers for financial gain.