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 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 risky from the insurer’s viewpoint. When an agent 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, 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’s building burns down. In this example, the insurer is 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.

Sidenote

Know this...

For a binding receipt to exist, an 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 “no-known-loss statement” or property inspection 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 (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.

For a binder to exist, the producer must receive the application and initial premium. If no initial premium is paid, the insurer may require a no-known-loss statement or inspection 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 are common in P&C insurance and provide immediate coverage until the policy is issued, canceled, or declined.

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.