Producer Roles and Receipt Types

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 known as 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 to 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 claims are 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, but during the 4 weeks it takes for the application to move through the underwriting process, the applicant dies. In this situation, the insurer is bound to the terms of the contract 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.

Policy delivery

Once the insurer approves the application and issues the policy, the producer usually delivers it to the policyowner. Delivery is more than handing over a document: several things that matter to the client happen at this moment.

Policy review

The producer should review the policy with the policyowner at delivery:

• Confirm the policy was issued as applied for. If the insurer issued it with a rating, an exclusion rider or other changes, explain them. A policy issued on different terms than applied for is a counteroffer, and there is no contract until the applicant accepts it
• Explain the main provisions, riders, exclusions and ratings, and make sure the owner knows the beneficiary designation is recorded correctly
• Point out the free look (right to examine) period, which begins when the policy is delivered
• Obtain a signed delivery receipt where the insurer requires one. The receipt documents when the free look period began

Constructive delivery occurs when the insurer gives up control of the policy, for example by mailing it to the policyowner or by releasing it to the producer with no conditions attached. The policy is considered delivered even if the owner has not yet received it in hand.

Effective date of coverage

When coverage begins depends on how the premium was handled:

• If the initial premium was paid with the application and a conditional receipt was issued, coverage is generally effective as of the date of the application (or the medical exam, if later), provided the applicant was insurable on the insurer’s standard terms
• If the premium was not paid with the application, coverage begins only when the policy is delivered and the first premium is paid, usually together with a statement of good health

The policy date printed on the contract is used to set premium due dates and policy anniversaries, and it may differ from the day coverage actually began.

Premium collection

If the initial premium was not collected with the application, the producer collects it at delivery. Under the law of agency, money a producer collects for the insurer is held in a fiduciary capacity: the producer remits it promptly and must never commingle it with the producer’s own funds. A check for premium is normally made payable to the insurance company, not to the producer.

Statement of good health

When the first premium is collected at delivery rather than with the application, the insurer normally requires the applicant to sign a statement of continued good health. It confirms that the insured’s health has not changed since the application was completed. If the insured has become ill or been injured in the meantime, the producer should not deliver the policy but return it to the insurer, which will decide whether to reconsider the application.

Lesson summary

Producers’ responsibilities include collecting premiums, acting according to 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.

At policy delivery, the producer reviews the policy with the owner, explains any rating or change from what was applied for, and notes that the free look period begins. Coverage begins at delivery and payment of the first premium unless a conditional receipt made it effective earlier. Premium collected at delivery is remitted promptly and never commingled, and is usually accompanied by a signed statement of good health.

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.