Learn more about the legal obligations of insurance agents.

Insurance agents are governed by common law, state law, and contract law. Common law requires agents to act in good faith, to exercise reasonable care and diligence, and to carry out the client’s instructions. State laws determine the licensing requirements insurance must meet. These laws are enacted by state legislatures and enforced by state insurance departments.

Insurance agent obligations to their clients vary from state to state. In most states, producers are considered order takers. They must comply with their clients’ wishes and obtain the coverages clients have requested. Agents must be reasonably diligent in obtaining those coverages and inform the client if they have been unsuccessful. If they fail to fulfill these duties, they could be sued by a client for damages. For example, suppose a company has just bought a warehouse, its first physical location. The owners tell their insurance agent they want a commercial property policy that includes building ordinance coverage. The owners emphasize that they need building ordinance coverage because building codes frequently change in their area. They receive their policy shortly after that. Six months later, the warehouse is badly damaged by a fire. The owners file a property claim with their insurer but the amount they receive for the claim is substantially less than expected. The agent failed to include building ordinance coverage in the property insurance application. If the owners sue their agent for negligence, the agent may be liable for the amount they would have collected under building ordinance coverage had the coverage been included.

Agents Are Not Advisors

Most states don’t require agents to determine the coverages a business needs, inform owners of all available options, or recommend specific amounts of insurance. An agent also isn’t required to monitor a business for changing circumstances to ensure it has the proper coverage. However, an exception may apply when a business and an agent have a special relationship. A special relationship may exist if the agent does any of the following:

Misrepresents the nature of the coverage provided; for instance, an agent says a property policy covers damage caused by earthquakes but earthquake coverage isn’t included Voluntarily determines the coverages a business needs Provides advice about the types of policies that are available and the exclusions they contain Presents themselves as a specialist; for instance, an agent says they’re an expert in insurance for restaurants Charges a fee for advice Has maintained a longstanding relationship with the client

If an agent does any of these things, they may be obligated to provide advice, including describing coverage options, explaining their advantages and disadvantages, and educating clients on the limits they need.

Insurance Agent Licensing

All states require insurance agents to obtain a license to sell insurance. The type of license an agent needs depends on the kind of insurance the individual intends to sell. For instance, an agent who wants to sell life and health insurance will need life and health licenses. In most states, agents must complete a specified number of hours of pre-licensing education to obtain a license. A license is typically valid for two years. To renew a license, an agent must fulfill the continuing education requirements imposed by the state’s insurance department.