By Cedric E. Stephens, ContributorQUESTION: WHAT are the duties that an insurance broker owes to its clients? Are those obligations limited in any way? Thirdly, are there any differences between dealing with a broker and an insurance agent? I am about to compare proposals from an agent and a broker and would like to know the pros and cons of doing business with each.
- M.B., Kingston 5
ANSWER: LAST week I replied to two of your questions. I looked at the duties brokers owe to their clients and gave some examples of things that they should be doing. This week I will compare the differences between dealing with a broker and an agent. At the end of this exercise you should be in a better position to choose which of the two you would prefer to do business with.
WHOSE INTERESTS DO INSURANCE AGENTS SERVE?
Insurance agents in Jamaica have been in business for a much longer time than brokers. Brokers, however, control more market share than agents. Indeed, some former agents are now brokers. There is more clarity in our legal system about the role of agents than brokers. The concept of agency is very common. It applies to all types of business and other relationships. An agent is a person [or company] who is authorised to act for another [the principal]. The basic rules are simple. The principal is responsible for the acts of the agent. The agent's acts are, generally, like those of the principal. The Insurance Act, 2001 affirms the basic principles of agency. It defines an "agent" as any person, firm or company
a) " appointed by that insurer, to solicit applications for insurance or negotiate applications on its (the insurer's) behalf and
b) "other than a broker, [is] authorised by the insurer, to effectuate and countersign insurance contracts on its (the insurer's) behalf."
There are two key points in the definition. The agent is the insurer's rep not the insurance buyer. Since the insurer is the agent's principal, the latter will always be jigging to the beat of the former's tune. The agent's main job is to sell [or solicit] insurance. Note nothing is said about giving advice to the buyer. The agent is primarily there to serve the interests of the principal and their own.
THE BROKER SHOULD SERVE THE BUYER'S INTERESTS
The broker is, on the other hand, the buyer's representative. This is why one of the broker's pre-purchase duties is to "obtain coverage that suits the clients' needs." The duty extends well beyond making a sale. When brokers fail to use "reasonable skill and care" to carry out their duties they can be sued by their clients. There are two local cases where this has happened. Both, which involved tens of millions of dollars were settled out of court. Buying coverage through a broker spreads the risks between broker and buyer. Buying coverage through an agent is like trying to mount a defence to a criminal charge without an attorney. The odds are stacked up against you. Risks that you thought had been transferred to insurers could come back to haunt you, literally.
I am a believer in the market. Brokers must be doing something right if they control the biggest share of the insurance market. I would be inclined to go with the broker's proposals. This assumes that their offerings were superior in qualitative and quantitative terms. By the former I mean that they showed an understanding of my business, analysed its needs, prescribed solutions to meeting those needs and had the staff to provide the services that they promised. In short, they are not simply in the business of peddling policies.
I hope that this will help you to analyse and compare the proposals you have before you.
Cedric E. Stephens provides impartial advice on risks and insurance. If you need free information or advice to solve a problem, write to The Financial Editor or, contact Mr. Stephens directly at aegis@cwjamaica.com
