In Property & Casualty Insurance Procurement & Litigation (Ten Recurring Themes Every Lawyer Should Know) insurance expert witness David L. Stegall, CPCU, ARM, ARe, RPA, of Risk Consulting & Expert Services writes on ten recurring themes that often lead to litigation. Attorneys either dealing in insurance procurement litigation issues or with clients who purchase insurance may want to consider these ten themes:
Theme 1 of 10
There are important differences between an insurance agent, an insurance broker, a wholesale broker and a Managing General Agent (MGA). An insurance agent is an authorized representative of an insurance company by contract and represents the insurance company to the buyer. An insurance broker is not an authorized representative of an insurance company, rather, the representative of the buyer to an insurance company. Both agents and brokers may be paid a commission by an insurance company but the nuanced relationship can become very important, particularly in a retail situation versus a wholesale situation.
A wholesale broker is commonly considered an agent or brokers’ broker. A wholesale broker has little or no direct dealing with the end-buyer of an insurance policy and deals entirely with the retail agent or broker, splitting commissions with the retailer. An MGA is also a wholesaler but is an authorized representative of the insurance company and acts beyond that of an agent, providing the underwriting function of an insurance company that has subcontracted those functions of the insurance company to the MGA. An MGA can act as a retailer or a wholesaler but is generally considered a part of the wholesale marketing system.
The marketing distribution system for insurance can be confusing to those outside the business. There are basically three systems. The first is what is called the “American Agency System” – this is the local independent agent who is an authorized representative for a number of different insurance companies, but also include the larger regional, national and international broker firms such as Marsh, AON, Willis (to name the top three); all of these act as retailers and deal directly with buyers of insurance. The second is the “Direct Writer System,” which has come to dominate the personal lines insurance industry in America, but is a distribution system used by Liberty Mutual (the largest) in the commercial marketplace. Agents for Direct Writers are employees of the insurance company and cannot generally write coverage outside their own company’s products. The third is the wholesale market, which includes excess and surplus line carriers, wholesale brokers and MGAs.
Lesson #1: An in-depth understanding of the roles, relationships, responsibilities, and marketing distribution systems in-play is important in litigation dealing with insurance procurement issues.
Reoccurring Conclusion: Just like poor legal advice, poor understanding of insurance procurement issues can be very expensive for your client!
David Stegall is the Principal Consultant at Risk Consulting & Expert. Mr. Stegall holds a B.A. in Communication from Auburn University and is a Chartered Property and Casualty Underwriter, an Associate in Risk Management and an Associate in Reinsurance, all awarded by The Institutes in Malvern. PA. He is also a Director of the Society of Risk Management Consultants.