Chapter Thirty-Seven

• Jurisdiction: New York

Chapter Thirty-seven

Agents and Brokers: Basic Issues

Samuel B. Mayer, Esq.

This chapter summarizes some basic provisions of New York law that bear on duties and liabilities of insurance brokers and agents, together known as insurance producers. In Part I, we discuss the distinctions among them. The issue of contingent compensation is discussed in Part II. Finally, in Part III we discuss basic insurance producer E&O claims. We will refer to “producer” as including an agent and/or broker, and to the Insurance Department as such or by the name of its successor (by merger with the Banking Department), the Department of Financial Services.

I. Agents and Brokers

Agents and brokers generally play different roles as the intermediaries between the insurer and the insured. “Agents” typically act as the appointed agent for the insurer, while “brokers” typically act as the representative of the insured. The capacity in which the producer acts is affected by representations made between the parties and what actions were taken in order to determine the role actually played by the agent or broker and, consequently, duties owed to the insurer and insured.

A. Insurance Law § 2101 Definitions

Insurance Law § 2101(a) defines “insurance agent” (with other exceptions) as:

[A]ny authorized or acknowledged agent of an insurer . . . and any sub-agent or other representative of such an agent, who acts as such in the solicitation of, negotiation for, or sale of, an insurance . . . contract, other than as a licensed insurance broker, except that such term shall not include . . . [an] employee . . . who . . . does not receive a commission . . . directly dependent upon the amount of business done. . . . ⁵³⁰³

Insurance Law § 2101(c) defines “insurance broker” (with other exceptions) as:

[A]ny person, firm, association or corporation who or which for any compensation, commission or other thing of value acts or aids in any manner in soliciting, negotiating or selling, any insurance or annuity contract or in placing risks or taking out insurance, on behalf of an insured other than himself, herself or itself or on behalf of any licensed insurance broker. . . . ⁵³⁰⁴

An insurance broker is in an agency relationship with the insured, not the insurance carrier.⁵³⁰⁵ In American Motorists Insurance Co. v. Salvatore,⁵³⁰⁶ the court found: “It has been long recognized in this state [New York] that there is a distinction between insurance agents and brokers. The former acts as agent of an insurance carrier and the latter appears as representative of the insured.”⁵³⁰⁷ In Evvtex Co., Inc. v. Hartley Cooper Associates Ltd.,⁵³⁰⁸ the court stated: “The courts in New York have long held that insurance brokers act as agents on behalf of an insured and not the insurer.”⁵³⁰⁹ The Evvtex court noted that the status of an insurance broker, as agent of the insured, is codified at § 2101 of the Insurance Law.

1. Affirmation of Authority

When there is doubt as to whether the broker or agent is working for the insurer or the insured, New York courts will look for an affirmation of authority.⁵³¹⁰

[A] principal is liable on contracts entered into on [its] behalf by [an] authorized agent. Essential to the creation of apparent authority are words or conduct of the principal, communicated to a third party, that give rise to the appearance and belief that the agent possesses authority to enter into the transaction. The agent cannot by his own acts imbue himself with apparent authority. ⁵³¹¹

Moreover, a third party with whom the agent deals may rely on the appearance of authority only to the extent that such reliance is reasonable. The Court of Appeals has affirmed this sentiment in Standard Funding Corp. v. Lewitt.⁵³¹²

Brokers have been found to be representatives of the insured even though the broker did not deal directly with the insured, since direct dealing with insureds is not an element of the applicable definition of “insurance broker” under Insurance Law § 2101(c).⁵³¹³ Thus, an insurance broker was found to be the agent of the insured, rather than the insurer, where the broker had to call the insurer’s local managing agent for specific authority before he could issue temporary binder to the insured.⁵³¹⁴ Generally, when a broker places insurance with a company he does not represent as appointed agent, he acts solely as the agent of the insured.⁵³¹⁵

2. Action May Determine Status

There must be evidence of some action on the insurer’s part or facts from which a general authority to represent the insurer may be inferred, other than the broker’s oral representation to the insured, in order to convert an insurance broker into an agent of the insurer.⁵³¹⁶

One court noted that while in popular language the plaintiff was a broker in the sense that it was his business to interest persons in applying for life insurance policies, he was nonetheless not a broker where commissions would be paid by the company of which he was an agent and they could be paid to him only as agent—thus, he was “an insurance agent” as distinguished from an “insurance broker.”⁵³¹⁷ As agent he was a representative of the company that employed him and which would have paid him his commissions. He could not, acting as a representative of that company, recover from the defendants compensation he would have received from his employer if the defendants had accepted the policies of insurance.⁵³¹⁸

A licensed broker was not the agent of the insurer so as to be held liable for breach of the common-law duty to provide the insurer with information, where the policy that the broker obtained for the insured was by application to an “assigned risk” pool, and where the risk was subsequently assigned to the insurer by the pool.⁵³¹⁹ This made acceptance of the risk by the insurer a matter of duty rather than of a voluntary relationship with the broker.⁵³²⁰

3. Binding the Insurer or Insured

When a broker procures an insurance policy on behalf of an insured, thus acting as an agent of the insured, any fraud or misrepresentation by the broker binds the insured.⁵³²¹ Furthermore, the insured is in such case bound, as principal, by notice to or knowledge acquired by the broker acting as the insured’s agent.⁵³²²

Conversely, the broker as the agent of the insured is generally unable to bind the insurer.⁵³²³ In Peerless Insurance Co. v. Young,⁵³²⁴ an insured claimed a broker represented on behalf of the insurer that insurance commenced before an accident, and the appellate division found that there was no evidence that the insurer did anything to hold the broker out as its agent. The insurer was unknown to the insured until after the accident, and the insured was not induced to rely on statements made by the insurer, but merely relied on the unwarranted representation of her own agent.

B. Dual Capacity

There is a limited exception to the general rule that an agency relationship does not exist between a broker and insurer. Under Insurance Law § 2121, an insurance broker may assume a dual role, as agent for the insured for obtaining insurance coverage and as agent of the insurer for the purpose of receiving payment.⁵³²⁵ Insurance Law § 2121 codifies this limited exception as follows:

(a) Any insurer which delivers in this state to any insurance broker or any insured represented by such broker a contract of insurance pursuant to the application or request of such broker, acting for an insured other than himself, shall be deemed to have authorized such broker to receive on its behalf payment of any premium which is due on such contract at the time of its issuance or delivery or payment of any installment of such premium or any additional premium which becomes due or payable thereafter on such contract, provided such payment is received by such broker within ninety days after the due date of such premium or installment thereof or after the date of delivery of a statement by the insurer of such additional premium. ⁵³²⁶

An insurance broker, when acting for an insured, is deemed the agent of the insured, which principle is now embedded in the statute, and that at the same time the broker has authority to receive premiums on behalf of the insurer.⁵³²⁷

The courts have uniformly held, even prior to the enactment of § 2121 of the Insurance Law, that when an insurer entrusts its policies to a broker for delivery to an insured, the broker acts as agent for the insurer in collecting and receiving the premium and that payment to the broker is deemed payment to the insurer.⁵³²⁸ The authority of the broker to act in a dual capacity, under the above section, extends only to the period in which the policy remains in force and after its delivery to him or her. It necessarily excludes the period between which the broker is engaged by the prospective insured to secure a policy of insurance and the receipt of the policy from the insurer by the broker. During this interval the broker is in privity solely with the customer and does not establish any privity with any insurance company until the latter impliedly consents to the broker’s collection of the premium by delivering the policy of insurance to him or her.⁵³²⁹

The Restatement (Second) of Agency also supports the proposition that a broker who is not a general agent of an insurance company may still be a special agent for the purpose of processing requests for policy loans and dividend withdrawals. “A special agent is an agent authorized to conduct a single transaction or a series of transactions not involving continuity of service.”⁵³³⁰ In addition, a principal and agent need not enter into a formal contract in order to create an agency relationship.⁵³³¹ Moreover, even if an insurance broker is an agent for the policyholder, the broker could also act as the insurer’s agent so long as the dual agency does not involve any conflict of interest.⁵³³²

Where an insurance broker acts as an agent for the insurer its acts may be treated as the acts of the insurance company itself.⁵³³³...