Just as the principal is bound by a contract created by the principal�s agent, the third party with whom the agent created the contract is also bound. The third party is bound either because he or she created an agreement with the principal�s authorized agent or because the principal ratified an agreement between the third party and an agent acting with apparent authority. Furthermore, since a principal would have an action against his or her agent if that agent defrauded the principal, there would also be an action against the third party if that person induced or assisted the agent in violating his or her duties to the principal.

An agent is not a party to the contract he or she negotiates between a third party and the principal. This means that he or she cannot sue either party based upon the contract. Any lawsuit by the agent against the third party would have to be based on a claim of a personal injury to the agent by the third party. Similarly, the third party cannot sue the agent based on the contract between the third party and the principal. The third party cannot sue the agent for breach of the agency agreement (if any) between the agent and the principal. Any action maintained by the third party against the agent has to be based on some misrepresentation or other personal injury caused by the agent.

Insurance producers, as agents or brokers, have duties to others in three specific categories:

The business of life insurance has its own set of laws for insurance companies and producers. These laws are primarily at the state level.

The relationship between the producer and the insurer is controlled by the producer�s agent or broker contract. An insurance agent or broker can become liable to an insurer by some improper conduct that causes loss or damage to the insurer. This could be a direct loss to the insurer such as negligent or intentional destruction of the insurer�s property. It could be based on a claim against an insurer by an insured or a beneficiary because of the producer�s actions. In either case, the insurance company may assert a claim against the producer to recover its losses.

According to Responsibilities of Insurance Agents and Brokers, "[t]he general principles in the relationship are simple enough. Agents, in the legal technical sense (1) have a duty of care to their principals, and (2) may not exceed their scope of authority and cause damage to their principals. Moreover, where a duty of care is owed someone, and there is a negligent breach of it to that one�s detriment, an action for damages will lie. Lastly, the legal conception of honest and fair dealing applicable to parties generally must always be considered (footnotes omitted)."

A producer�s duties to the insured usually arise at one of the following three levels:

At the generalist level the basic level of responsibility has been clearly articulated as follows:

As in any other agent-principal relationship, an insurance agent owes a fiduciary duty to his or her principal. Because of the nature of life insurance marketing, however, it is not always easy to answer the question, who is the principal?

Most people assume that the insurance producer is the agent of the insurance company with whom he or she has an agent�s contract. Such an assumption is correct, but there are many exceptions to this rule. The result is that an insurance producer may be an agent of the insurer for some purposes and an agent of the insured for others. For example, an insurance producer is clearly the agent of the insurer for purposes of taking the application and accepting payment of premiums.

On the other hand, delivery of an insurance policy is an act where the producer�s agency can shift between the insured and the insurer. For example, assume the policy has been issued and given to the agent for delivery to the insured without any further act to be performed by the insured. In that event, the producer acts as agent for the insured for delivery of the policy. A physical transfer from the producer to the insured is unnecessary for the policy to be in force. However, if the agent has been instructed to deliver the policy only after some condition is fulfilled (such as determining that the insured is in good health or obtaining payment of the first premium), then the producer remains the agent of the insurer for purposes of delivering the policy. In that event the insurance policy will be effective only upon fulfillment of the condition and the transfer of the policy.

In the usual context, an insurance agent is considered to be the representative of the insurer, and an insurance broker is deemed to be the representative of the insured. As indicated earlier, this is the presumption created by the statutes defining "agent" and "broker" that are based on the NAIC model act.

Statutory distinctions between agents and brokers are frequently overlooked by the courts when the issue is a producer�s liability to his or her clients: "The courts do not draw any fine distinctions between agents and brokers in imposing liability. It is well recognized that many are both agents and brokers; that a broker often is acting as agent for the insurer; and that an agent may have direct obligations to the insured, whether he is licensed as a broker or not."

Requiring (or at least recognizing) that an individual be the agent for two potentially adverse principals is at odds with normal agency law, but there are numerous cases where such a dual agency has been found. For example, a broker is considered to be the agent of the insured for most purposes. Nevertheless, he or she becomes the agent of the insurer for purposes of taking the application and delivering the policy. A broker is also the agent of the insurer for purposes of accepting the first premium payment and delivering it to the insurer.

Three factors further blur the agent-broker distinction. First, several states have statutes that impose certain agency duties upon brokers with respect to insurers. Second, several states have no statutory category at all for brokers. Third, even though a producer may be a "broker" with respect to his or her property/casualty business, in order to sell life insurance, the producer will have to be licensed as an "agent" of a life insurer.

Those agents who state or imply that they purchase insurance for the client, that they select from among many different insurers on behalf of the client, and that they are acting for or in the best interests of the client help create an implied or apparent agency relationship between the producer and the insured. Although it is common for clients to refer to the producer as "my agent," and it is also common for the producer to tell the client, "I�m your agent," the consequences of comments like these can be the creation of an agency relationship between the producer and the insured.

Lazzarra v. Aetna Cas. & Sur. Co. imposed a fiduciary duty on a broker in favor of the insured. Perhaps that duty would not have been imposed had the producer been an agent rather than a broker. However, even if a producer is not held to be an agent of the insured, the courts may find a way to impose duties upon the producer based upon the producer�s representations of special expertise.

However, there are cases to the contrary. In Lazovick v. Sun Life Ins. Co. of America the producer was held to be the insurer�s agent, not the insured�s. Thus the agent had no fiduciary duty to advise the insured. Under the facts of this case, the purchase of insurance is an arm�s-length transaction involving no confidential or fiduciary relationship between the insured and the agent.

Chartered Life Underwriters and Chartered Financial Consultants have worked to build a reputation for professional expertise and credibility. "This heightened status of agents is not always an advantage, given our litigious society where the desire to redress harm frequently outstrips the need to uncover fault and where the search for justice seemingly has been replaced by the search for the deep pocket."

It follows that the more credentials and expertise a person has or professes to have, the less tolerance others will exhibit toward real or perceived shortcomings in performance. In effect, the possession of such expertise may create an expectation that the possessor will act according to a higher standard. The law clearly recognizes if a person holds himself or herself out to have a special level of expertise, the public has a right to expect that the person will have the expertise professed and will exercise that expertise.

An example of the higher standard imposed upon experts is Hardt v. Brink. Here, a property/casualty agent was found liable to the insured on the basis of the agent�s failure to exercise the degree of expertise he held himself out to possess. In an attempt to escape, or at least spread the liability, the insurance broker argued that the insured�s lawyer was the party responsible for the improper coverage. The court responded that although the lawyer may also be responsible for the accuracy of a client�s legal affairs, that did not relieve a skilled insurance consultant of his responsibilities and liabilities.

Does this impose a standard of care equal to that of a lawyer? Probably not, but the standard is certainly far in excess of the "reasonable skill, care and diligence standard for one who merely claims to take applications for insurance. The law here involved is not particularly startling; nor is it necessarily an extension over previous cases. This is an age of specialists and as more occupations divide into various specialties and strive toward �professional� status, the law requires an even higher standard of care in the performance of their duties."

A difficult question is whether a producer has a duty to place insurance that is suitable for the needs of the client. In Knox v. Anderson a life insurance agent was found liable because he induced the insured to rely upon his expertise. The insurance the producer placed was found to be unsuitable for the insured�s purposes. The court found in Knox that the producer was not an agent of the insured and therefore was not a fiduciary with respect to the insured. Nevertheless, he was held liable because (1) his professed expertise had induced the client to rely upon his advice, and (2) the product the agent sold was unsuitable for the client�s purposes.

Insurers have the right to limit the powers of their agents. A typical policy limitation on an agent�s authority is as follows:

This contract can be changed only by our President, Secretary, or one of our Vice Presidents, and then only in writing. We will make no change in this contract without your consent. No agent is authorized to change this contract.

Any limitations on an agent�s powers contained only in the policy are ineffective notice for actions taken by the agent prior to the delivery of the policy. Limitations in the policy are effective after delivery, regardless of whether the insured has read the contract. (This is due to the general rule of law that a party to a written contract is presumed to know and to consent to all its terms.)

Nevertheless, if the insurer, by a course of conduct after delivery, effectively grants to the agent a power otherwise denied in the policy, then the contractual notice of limitation will be ineffective. In Protective Life Ins. Co. v. Atkins the agent�s misrepresentations of the policy terms contradicted the actual policy language. The policy also contained language that limited the agent�s authority to make policy modifications. Because the contract was a mortgage insurance policy and the agent was also an officer of the bank making the mortgage loan, the court ruled that the policy limitation was insufficient to limit the agent�s authority.

It is common for insurance applications to have limitations on an agent�s authority, as in this example:

These limitations are seen (or deemed to have been seen) by the insured prior to the issuance of the policy and thus are early notice to the insured of the scope of the agent�s authority. As with the policy, however, if the insured signs the application, he or she is deemed to have read and agreed to its terms. Also if the insurer permits the agent to take action inconsistent with the limitation, it will waive its rights to enforce the limitation.

The method of terminating agency authority depends on the type of agency authority given to the agent. Actual agency authority (whether express or implied) may be terminated by complying with the relevant provisions of the agreement that created the agency between the parties. It may be terminated by the action of the principal (by dismissal of the agent) or by the action of the agent (by giving notice of resignation). Actual agency authority may also be terminated by operation of law, as when an insurance agent�s license to sell insurance is revoked. Note that the termination of actual agency authority is between the agent and the principal; notice to third parties is not required. However, apparent agency authority may exist after actual authority has been terminated.

Independent of a grant of actual agency authority, the principal may permit a person to appear to have agency authority. This is known as apparent authority (discussed earlier in this chapter), and it lasts until the principal gives direct notice to third parties that the agency has been terminated or until the principal no longer permits the agent to appear to have agency authority. Apparent authority may also exist after an agent�s actual agency authority has been terminated. In some cases the principal may fail to remove all of the indicia of agency authority from the agent�s control. If so, any third party who reasonably relies upon that apparent authority will be protected in his or her dealings with the agent, and the principal will be bound even if actual agency authority has been terminated.