Like most small businesses, you probably purchase your insurance policies through an insurance agent or broker. Agents and brokers perform very similar functions. Both act as intermediaries between you, the insurance buyer, and insurers. Both have a legal duty to help you obtain the coverage you need at a reasonable price. Both an agent and a broker must have the proper license to sell insurance. He or she must also adhere to the regulations enforced by your state insurance department.
Yet, the functions of insurance agents and brokers are not identical. This article will explain how they differ. It will also explain how agents and brokers make money from the premiums you pay your insurers. Except where noted, the following discussion applies to agents and brokers selling property/casualty coverages.
The differences between a broker and an agent may vary somewhat from one state to another. Generally, an agent represents one or more insurance companies. He or she acts as an extension of the insurance company. A broker, on the other hand, represents the insurance buyer.
An insurance agency cannot sell insurance products on behalf of a specific insurer unless the agency has been appointed by that insurer. An appointment is a contractual agreement that specifies what products the agency may sell and what commissions the insurer will pay for each product. The contract usually spells out the agency’s binding authority, meaning its authority to initiate a policy on the insurer’s behalf. The agent may have permission to bind some types of coverage but not others.
Agents are either captive or independent. A captive agent represents a single insurer. For example, agents that represent Allstate or State Farm are captive agents. An independent agent represents multiple insurers.