Producers’ responsibilities

Producers have specific responsibilities to both the insurer and the insured. Under the law of agency, they have the financial responsibility to collect premiums and submit 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 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. Life and health producers are trusted to handle client funds and help manage clients’ insurance needs. Producers assist 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 an application, the applicant is given a receipt. The type of receipt matters because it can affect how a claim is handled if a loss occurs while the application is still in 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. The applicant later turns out to be uninsurable. However, during the 4 weeks it takes for the application to move through underwriting, the applicant dies. In this situation, the insurer is bound to the contract terms and must pay the beneficiary $100,000.

Conditional receipt

A conditional receipt can still bind the insurer to the terms of the contract if the applicant dies before underwriting is complete, but only if the company determines that the applicant was insurable. If the applicant is found to be uninsurable, the premium paid with the application is returned to the applicant’s estate.

Sidenote

Know this...

For a binding or conditional receipt to exist, offer and consideration must be in place. That means the producer must receive the application for insurance and the initial premium. If the applicant does not pay the initial premium at the 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 under the prudent person rule, and fulfilling 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: The most restrictive because the insurer is bound to the contract terms being applied for.
• Conditional receipt: Binds the insurer only 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 the 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). Binders may be oral or written and generally provide coverage for no more than thirty days, depending on state law and insurer guidelines.

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.