Author: Chris Boggs

Can an insurance carrier and its agent hold a client hostage? Short of any statutory prohibition, the answer appears to be yes.

Without a law to the contrary, the contractual agreement between an insurance carrier and its agent appears to allow for "special consideration" regarding the recognition and acceptance of an agent of record (AOR) request. But does this ever actually happen?

A member agent contacted the VU recently with this exact issue. The insured wanted to maintain its relationship with the insurance carrier but no longer desired to work with the incumbent agent due to poor service, missed exposures/coverage and various other reasons.

The insured knowingly and willing completed, signed and delivered an AOR request to the insurance carrier naming a new agent. The carrier refused to act upon the AOR stating that the incumbent/losing agent had a "preferred" contract meaning that the carrier could accept the AOR only if the incumbent agent agreed to the change. Guess what, the agent wouldn't agree to the change.

Even though the insured has no desire to do business with the agency, they are stuck. This "preferred treatment" contract allows the agent to hold the insured hostage simply because the insured desires to keep the relationship with the carrier.

Should a carrier and its agent conspire to hold a client hostage? Apparently not every agency or carrier sees the obvious answer as "NO"!!

First, while the practice may be legal, it seems unethical. Forcing a business relationship upon an insured when the client no longer desires to do business with one of the parties is a question of ethics. It is unethical for the company to refuse to accept a reasonable and legal request from their insured – you know, the party with whom they have contracted to provide coverage. The ethical agent would step aside and the ethical carrier would agree to the change when it becomes clear the insured no longer wants to do business with that particular agent. 

Secondly, the agent contractually represents the insurance company, acting as the "go between;" but the agent is NOT a party to the insurance contract, meaning the agent has no privity of contract. The common law doctrine of privity of contract provides that a contract cannot confer rights or impose obligations arising under it on any person or agent except the parties to the contract. There is likely nothing in the insurance policy (insurance contract) that states the carrier can override the insured's desire regarding the agent of record simply because of a separate agreement between the carrier and the agent.

This, holding the insured hostage is not only unethical, it appears to violate contract law.

Lastly, holding the client hostage is just bad business practice. The agent is accomplishing nothing beyond creating bad will and is angling for a major errors and omission (E&O) loss. Likewise, the carrier is placing a wall between itself and the insured.

From an E&O perspective, if the agent misses anything and a loss is not covered or not covered in full, the hostage if far more likely to sue than if there was a good relationship between the agent and the insured. And the insured may even look for reasons to sue. Keeping that commission may cost the agency dearly in the future – unless they do everything perfectly.

Also, why would the insured want to do anything more than meet the minimum policy requirements if the carrier won't honor its wishes. The carrier is creating an adversarial relationship that could result in long battles and even charges of bad faith in the future.

Ethical, legal and business issues aside, the real reason the agent and carrier should honor the insured's request – it's simply the right thing to do. Rarely does an insured leave an agency unless there is some level of dissatisfaction that cannot be repaired or a change in relationships. Why would you want to stay in a defective relationship and make both sides miserable? Eventually both the agent AND the carrier are going to lose the business if they fail to do the right thing.

In January 2015, the Independent Insurance Agents and Brokers of New York (IIABNY) adopted an AOR policy statement essentially stating that the client's interest should come before the agent's interest. This is known as altruism. Altruism is a mark of the true professional. IIABNY's statement reads:

Independent insurance agents and brokers believe that their client's interests should always be placed above the individual interest of the agent/broker. Agents and brokers are challenged to exceed their client's expectations; to deliver the highest quality insurance products and services in the most cost-effective, efficient, responsive and professional manner. Clients choose and retain their agent/broker based on competency, qualification, resources, relationships, performance and the level of trust and confidence that's established prior to, and earned throughout, the agent/broker's appointment.

Client expectations may not always be met - for a variety of reasons - and as business relationships evolve, an agent or broker's appointment as a client's authorized insurance representative may be subject to change. Change can occur when a customer terminates via an Agent/Broker of Record Letter, their current agent/broker relationship. In a written notification to its insurer(s) a consumer can authorize new representation with another of a carrier's licensed agent/broker representatives. Not all insurers, however, are willing to recognize these changes and no uniform standard or regulation exists to protect consumer's interests. Similarly, an agent/broker has the right to decide when to engage or terminate a particular client or insurer relationship, and may do so without cause by providing timely notice.

Agents/brokers and insurers have an ethical obligation to address change in representation situations in a timely manner that is wholly consistent with the principle of consumer choice, and IIABNY supports this position. IIABNY rejects and opposes any agent/broker-insurer contractual or procedural requirements or protocol, which unreasonably limits or otherwise inhibits a consumer's right to change their appointed insurance representation at any time.

In New York State no law or specific regulation governing Agent/Broker of Record Letter situations exist, nor are there any specific notification requirements developed for the protection of the consumer. IIABNY believes that voluntary compliance with consistent industry standards is preferable to legislative action and establishes as its Board policy the following standards:

• The insurer should recognize an insured's request for change of agent/broker at any time during the policy period.
• As a courtesy the insurer should provide the incumbent agent/broker with 15-days written notice before processing the change request.
• The incumbent agent/broker should be allowed to provide the insurer a letter rescinding the change from the insured within that 15 day period.
• The agent/broker that initiated the policy should receive all the commission for the policy period, regardless of the date the agent/broker of record change takes effect. A carrier may choose to pay commission on an additional premium endorsement after the agent/broker of record change, as long as they apply that approach to all like situations.

IIABNY supports the consumer's right to choose and consistent standards for agent/broker of record notification. IIABNY encourages insurers to permit changes in representation at the policyholder's direction, including mid-term changes of agent/broker appointment, and to voluntarily adhere to consistent standards as outlined above.

Beyond IIABNY's policy statement, a major national insurance carrier recently codified its AOR standards stating that all AORs will be honored at renewal. Yes, it appears the incumbent agent has the opportunity to gain a rescinding AOR; but if that attempt fails, the agent assigned via the AOR takes over at renewal.

No authority exists in the VU to recommend or make policy statements on behalf of members or their carriers; the only grant of "power" extended to the VU is that of the printed word and any opinion it may influence. In light of this limited power, the VU's stance is that the insured is the only party to the contract that has the authority to assign an agent. 

Last Updated:  June 23, 2017