What Are You Anyway’ Agent/Broker Distinctions Can Get Muddled

Recent legislation has industry circles wrestling over the ongoing question: What makes an agent an agent and a broker a broker?

An agent is traditionally defined as a licensed individual or organization authorized to sell insurance by or on behalf of an insurer. An agent has binding authority from insurance companies, is paid exclusively via commissions and never charges a fee.

A broker is traditionally defined as a licensed individual or organization who transacts insurance on a consumer’s behalf, and therefore is not appointed by an insurance company. Brokers may charge a broker fee for their services, but they do not get paid a commission and they do not have binding authority.

Over the years, these traditional, factual distinctions that define agents and brokers have become a bit blurred. “They no longer hold, at least not in every case,” said Steve Young, IBA West senior vice president and general counsel. “Which is really no surprise when you look at everything else that is going on in the economy at large,” he said.

In the early days of insurance, a company was one of the three: a direct writer, a captive agency or an independent agency. “And whichever one you were, you thought the other two were basically evil,” Young said. “Today we have brokers who are given binding authority. We have agents who are charging certain fees. We have brokers who are getting paid a commission in addition to a fee.” And the list goes on.

Inquiring minds in the Golden State

“Historically, at least in California, there is a pretty clear line of demarcation between agents and brokers,” Young said. “It gets a little confusing because a particular producer may be acting as an agent on one policy and a broker on the next…the fact that you can act in both capacities is really underscored by the change in California law years ago which created a single broker-agent license.”

In California, the term broker-agent is used to describe two distinct types of licenses. A fire and casualty (FX) licensee is a person authorized to act as an insurance agent, broker, or solicitor, and a fire and casualty broker-agent license is a license to act.

With that being said, now throw one more designation into the mix: an insurance solicitor. A person authorized to act as a solicitor cannot be appointed by more than one employing broker-agent and is not eligible at the same time to act as an agent or broker. Similarly, a person authorized to act as either an agent or broker is not eligible at the same time to act as a solicitor.

Fire and casualty broker-agent is the title that appears on the official certificate “which is suitable for framing, with the Insurance Commissioner’s autograph, that every licensee gets,” Young said. “But it remains true, notwithstanding, that the designation on the actual license, that a licensee continues to act in specific contractual capacities.”

Under California law, whenever an insurance company designates a particular insurance producer-whether acting as an agent or a broker-an Action Notice of Appointment is required. Form 417-5 authorizes the licensee to act as a broker, Form 447-54 authorizes the licensee to act as an agent, and an Action Notice of Solicitor (Form 417-31) authorizes the licensee to act as a solicitor.

“And likewise, whenever the company decides to terminate that authority-to terminate a particular producer as an agent-they are required to notify the Department of that as well,” Young said. “So there is a very important legal distinction.”

A second major factor in the law is that if a producer wants to act as a broker, a $10,000 bond must be filed. This is not a requirement of an agent. “So it’s not as if you can never tell the two apart,” Young said.

With the passage of Financial Services Modernization, one must not forget to
throw banks into the equation. Years ago, banks were not in the business of insurance. “Now they’re in just about every business or will be soon,” Young said. “So everything is changing an awful lot in the marketplace, and I think it’s fair to say that the law and/or regulation in this area is not yet caught up.”

A bill to define a broker

On Feb. 25, Assemblyman Calderon introduced AB 2639 (sponsored by Mercury Insurance) in an effort to clearly define a broker. The bill, amended in Assembly on March 30, was scheduled to be heard in Assembly Insurance committee on April 12, but hit a roadblock after it was removed from the committee’s calendar.

According to the American Agents Alliance, AB 2639, along with proposed broker regulations created by the Broker Fee Advisory committee, would clear up the ambiguity over agent and broker.

The issue of defining a broker-as well as a broker’s ability to charge broker fees-has been a top priority of the Alliance for some time. Earlier this year, the association was forced to pull its support of the proposed broker fee regulations due to unresolved concerns over unclear definitions of the two titles. The CDI will be holding a hearing on the proposed broker fee regulations sometime in early June.

While other associations are sitting on the sidelines, the Alliance-the only group who has a team on the playing field-supports AB 2639 and feels that defining a broker will be helpful to both producers and consumers.

“IBA West, as one member of the Agent and Broker Legislative Council, is simply taking a watch position [on AB 2639],” Young said. “We’re not supporting it, we’re not opposing it, we’re just watching it.”

Speaking of opposing, Tim Hart, chief of the CDI’s Legislative Bureau, sent a letter to Assemblyman Calderon giving reasons why the Department is against enactment of the bill. “This bill…would create needless consumer confusion and enforcement nightmares for the Department,” Hart said in his letter. “Simply put, a licensee exercising the duties, responsibilities and authority of an agent should not be permitted to call him/herself a broker. Allowing him/her to do so would misinform consumers; shield the insurer from liability for the acts of its agent; and permit circumvention of rate regulation requirements.”

Functional solution

Is it possible to eliminate the broker and agent designations altogether? Or would that just create even more confusion?

One very important part of this equation, according to Young, is case law. “There is an awful lot of case law in California and other states…under the law of agencies, and I use that phrase not in the insurance sense but just in the legal sense, about fiduciary duties,” he said.

If things do change, they won’t change overnight. “This requires some real serious consideration,” Young said. “It’s not something that we should sort of lunge head-first into the pool on.”

Topics California Agencies Legislation