The distinction between an agent and broker has had increased significance in California following Proposition 103 as brokers may charge broker fees and agents may not. Producers rely heavily on broker fee income due to declining commissions on certain property and casualty risks, most notably for automobile and homeowners. While some brokers do not charge broker fees, many others do. The recent Krumme v. Mercury litigation and several recent actions by the Department of Insurance suggest that insurance producers need to fully understand the distinction between a broker and agent. Brokers especially need to ensure that their contracts with insurers are brought up to date to properly reflect this distinction.
Legal distinctions between agents & brokers
The most basic definition of an insurance agent is provided in Section 31 of the California Insurance Code, which states that an insurance agent is “a person authorized, by and on behalf of an insurer, to transact all classes of insurance other than life insurance.” [All statutory references herein are to the California Insurance Code or Title X of the California Administrative Code (the “Regulations”)]. In contrast, an insurance broker, is defined by Section 33, is “a person who, for compensation and on behalf of another person, transacts insurance other than life with, but not on behalf of, an insurer.” These statutory sections explain that at the most fundamental level, agents transact on behalf of the insurer while brokers transact on behalf of the insured.
More than the differences in statutory definitions, however, agents and brokers are not regulated in exactly the same manner, even though California issues a joint broker-agent licensee for fire and casualty insurance. For example, fire and casualty broker-agents who act as agents are required to have on file with the Department a notice of appointment executed by the insurance company or companies that the agent represents. No similar requirement exists for brokers. [See Section 1704].
According to Section 1731, a person licensed as a broker-agent who has a notice of appointment on file with the Department shall be deemed to be acting as an insurance agent. There is, however, no reciprocal presumption that a broker-agent is acting as a broker if he or she does not have a notice of appointment on file. Moreover, notwithstanding Section 1731, the case law indicates that there is no single dispositive factor for determining whether a producer is acting as an agent or a broker.
Although case law demonstrates some of the difficulty of distinguishing agents and brokers, the line is also blurred in the statutes. For example, Section 1732 provides that a fire and casualty broker-agent can perform the role of an agent for the insurer and a broker for the insured within the same transaction. In rather cryptic fashion, Section 1623 as recently amended states that if an insurance application lists the producer as an insurance broker it is presumed that that the person is acting as a broker, but for licensing purposes only. [This section was amended in 2000].
It is unclear what the legislature intended by including the phrase “for licensing purposes only” in Section 1623. Considering that only a person licensed as an insurance broker can legally act as broker or indicate on an application that he or she is a broker, the caveat “for licensing purposes only” seems to add nothing to the section. For example, what legal significance does this have on the license status of a fire and casualty broker-agent who indicates on an insurance application that he or she is acting as a broker? To limit the purpose of the statute to a licensing matter when the person is already licensed to transact insurance as a broker is a non sequitur. Without the seemingly meaningless phrase “for licensing purposes only,” the statute indicates that if a licensed broker states on an application that he or she is acting as a broker it is presumed the person is acting as a broker.
A final regulatory requirement for fire and casualty broker-agents who act as brokers is established by Section 1662. Specifically, that section mandates fire and casualty broker-agents who act as brokers must post a bond with the Department.
The statutory differences between agents and brokers with regard to agents and brokers can be summarized roughly as follows: An agent represents the insurer and must have the insurance company or companies it represents file an Action Notice of Appointment (i.e., agent appointment) on its behalf with the Department; a broker represents the insured and must post a bond with the Department. As demonstrated above, §§ 1623 and 1732 muddy the waters by suggesting that a producer’s labeling of him or herself as a “broker” on an insurance application may determine the role of that producer in a particular transaction and that a producer may act as an agent and a broker in the same transaction. Additional confusion is caused by the fact that insurance brokers are often referred to as “agents.” However, this is only accurate in so far as the broker has an agency relationship with the insured.
Although the statutory guidance set forth above provides a general framework with respect to classifying agents and brokers, the practical realities of insurance production often make distinctions more difficult. This fact is borne out by applicable case law.
Applicable case law
A variety of cases in California address the general distinctions between agents and brokers. Three cases in particular concentrate on important distinguishing factors. As these cases demonstrate, the question of whether a producer is an agent for the insurer or broker for the insured, or both, is generally a question of fact and the court will look at the totality of circumstances in making its decision.
The court in the well known case, Marsh & McLennan v. City of Los Angeles, suggests that strictly looking to whether there is an agent appointment on file is an overly simplistic way to distinguish agents and brokers. Although the case applies the totality of the circumstances with respect to this distinction, it should be noted that the court was examining whether a producer who was lacking an agent appointment could be construed as an agent. It did not involve an appointed agent who may have in fact been acting as a broker. Moreover, there is no case to date where the court considered an appointed agent to be a broker. Accordingly, the Department of Insurance holds that if the producer has an agent appointment on file he will be considered to be an agent of the appointing insurer; whereas, if the producer does not have an agent appointment on file the Department or reviewing court may examine all the circumstances to determine if the producer is acting as an agent or broker.
Three cases that provide significant insight as to how courts analyze and categorize insurance agents and brokers are Eddy v. Sharp, 199 Cal. App. 3d 858 (1988), Loehr v. Great Republic Insurance Company, 226 Cal. app. 2d 727 (1990) and Marsh & McLennan. The foremost principles of these cases can be summarized as follows:
Independent agents (i.e. those with multiple agent appointments on file with the Department) can be found to be agents and brokers depending on the circumstances. The totality of the circumstances is relevant to the analysis, but one of the most important distinguishing characteristics between agents and brokers is the ability of an agent to bind the insurer.
Although the existence of an agent appointment should not be the sole criterion for determining whether a producer is an agent or a broker, a producer that knowingly has an agent appointment on file will almost certainly be considered an agent to the appointing insurer; whereas the lack of an agent appointment does not preclude a court from finding that the producer is acting as an agent.
Agents, especially independent agents who represent multiple insurers, when acting beyond the scope of their agency may represent the insured in a limited capacity and in doing so may incur additional duties to the insured—duties beyond the general duty of reasonable care an insurance agent owes his client.
Generally, whether a producer who accepts an application for insurance is an agent of the insurer or a broker is a question of fact to be determined by the manner in which the producer acts rather than by the label given him by the insurer. 43 Am.Jur.2d Insurance § 113. Section 113 of that treatise suggests that answering the following additional questions can also help identify whether a producer represents the insurer or insured in a particular transaction:
Was the broker at the time of effecting the insurance actually or ostensibly connected with the insurer and employed by it, or was he acting independently of any employment by the company?
From whom did the broker’s express or implied authority to do the act in question originally proceed?
Was the act one which the broker was expressly authorized to do, or was it a usual and necessary means to accomplish the execution of the authority conferred?
Was the act done independently of the original employment, and if so, for whom, or at what instance?
Which party could the broker hold directly responsible for his remuneration at the time the act in question was done?
The problem with agent and broker fees
The foregoing analysis regarding the distinctions between agents and brokers becomes increasingly important for those producers who charge broker fees. If producers who charge fees are categorized as agents then the Department of Insurance maintains that additional charges to the insured would violate the rating statutes because the fees were not part of a filed or approved rate filing. The Department could hold the agent responsible as a violation of the broker fee regulations, as well as take action against the insurer under the rating law.
Pursuant to § 1861.05 insurers must file and have approved by the Department all rates they desire to change or remain in effect. In McLennan, the premium charged by an insurer’s agent is imputed to the insurer thereby exempting the insurance agent from paying municipal taxes. Moreover, as the insurer’s representative, the agent’s actions are generally imputed to the insurer. Therefore, anything the agent charges the insured in connection with placing insurance with a particular insurer is considered part of premium charged by the insurer which, in turn, must have been approved by the Department.
Krumme v. Mercury
In the recent Krumme case [currently on appeal] the court applied a totality of circumstances test in reaching its conclusion that certain Mercury brokers who sell Mercury’s personal lines auto insurance were not appointed as insurance agents and may have improperly charged broker fees. The court held that the consolidation of the broker/agent license in 1990 and subsequent amendments to Insurance Code sections 1625 and 1625.5 did not abolish the requirement for insurance companies to file action notices under section 1704(a) for all licensees acting as agents on behalf of a carrier.
As such, Mercury’s insurance agents that were charging broker fees were held by the court as doing so improperly and violate the broker fee regulations. The court specifically rejected Mercury’s contention that a producer may be both an agent and broker under existing licensing laws in California, which is the equivalent of a dual agent.
We expect that the courts will continue to wrestle with the dual agency concept in the future especially in the area of auto insurance.
Under the dual agency concept, insurance producers who subscribe to comparative rater systems such as the FSC rater, are sought out by customers to determine the best and cheapest coverage. Notwithstanding that the producer is appointed, the argument is that the producer in aiding the customer in selecting insurance from a number of insurance companies regardless of appointment is acting on behalf of the customer as a broker. In this scenario, the dual agency theory has merit if the producer acts as a broker in shopping the market and ultimately selecting the best insurance for the customer’s needs. If appointed by the selected insurer, the producer’s status then changes from a broker to an agent for the remainder of the transaction. Under this theory the producer would be entitled to charge a broker fee for searching the market on behalf of its customer.
AB 1297 is a two-year bill, which in its original form sought to deal with the ambiguity in the 2000 amendment to section 1623, discussed above, which created a presumption of broker status “for licensing purposes only” if the application states that the producer is acting as a broker. AB 1297 sought to extend section 1623 by creating a conclusive presumption of broker status if the producer utilized a broker fee agreement and disclosure form signed by the applicant and the producer maintained a broker’s bond. It also attempted to clean up the binding authority issue by extending binding authority to brokers in compliance with this section.
However, opponents to the bill, including the Department, have exerted pressure to “water down” the bill by eliminating the conclusive presumption effect of broker’s status. Under the revision, the same factual proof requirement as in the “totality of the circumstances” would be retained, thus undermining the initial purpose of the initial bill.
It is suggested that producers which have appointments on file with particular insurers refrain from charging broker fees on business placed with those insurers. Brokers should review their producer contracts to ensure that the contract language clearly delineates that the broker is actually representing the interest of the consumer or the insurer.
Robert W. Hogeboom is a partner in the Los Angeles office of Barger & Wolen LLP. He has been an insurance regulatory specialist since 1977, dealing exclusively with insurance regulatory and administrative matters. He currently serves as the general counsel to the American Agents Alliance.