Paul Sanchez
The average consumer often doesn't consider whether the person they are buying insurance from represents the insurer or themselves. California courts recognize that the primary distinction between an insurance agent and an insurance broker is that an agent acts on behalf of the insurance company, while a broker acts on behalf of a policyholder. In California, insurance agents are defined by Section 31 of the California Insurance Code as a person authorized, by and on behalf of an insurer, to transact all classes of insurance other than life insurance. On the other hand, insurance brokers are defined by Section 33 as a person who, for compensation and on behalf of another person, transacts insurance other than life with, but not on behalf of, an insurer. This distinction has become more significant in California following Proposition 103, as brokers may charge broker fees, while agents may not.
| Characteristics | Values |
|---|---|
| Definition of an insurance agent | A person authorized, by and on behalf of an insurer, to transact all classes of insurance other than life insurance |
| Definition of an insurance broker | A person who, for compensation and on behalf of another person, transacts insurance other than life with, but not on behalf of, an insurer |
| Agent appointment requirements | Appointed by each insurance company they represent before placing coverage with that company |
| Broker appointment requirements | Must post a $10,000 bond before acting as a broker |
| Agent transaction fees | May not charge broker fees |
| Broker transaction fees | May charge broker fees |
| Licensing requirements | California requires 32 hours of education, including 12 hours in ethics and California insurance code, and 20 hours of education in the selected insurance field |
| Statutory sections | Agents transact on behalf of the insurer, while brokers transact on behalf of the insured |
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What You'll Learn
California Insurance Code distinctions
The California Insurance Code makes a clear distinction between insurance agents and brokers. According to Section 31 of the Code, an insurance agent is defined as "a person authorized, by and on behalf of an insurer, to transact all classes of insurance other than life insurance". On the other hand, Section 33 defines an insurance broker as "a person who, for compensation and on behalf of another person, transacts insurance other than life with, but not on behalf of, an insurer". In other words, agents act on behalf of the insurer, while brokers act on behalf of the insured or policyholder. This distinction is important because brokers may charge broker fees, whereas agents may not.
Despite the statutory definitions, the roles of agents and brokers can overlap in practice. For example, a licensed broker may act as a broker when placing insurance but may also collect premiums and deliver policies to the insured, typically considered the role of an agent. In such cases, the California Insurance Code states that the person should still be considered a broker. Additionally, some independent agents call themselves insurance brokers, even though they are not. This confusion is further compounded when insurance brokers are referred to as "agents", which is only accurate if the broker has an agency relationship with the insured.
To become a licensed insurance professional in California, individuals must complete pre-license training, including 32 hours of education. This consists of 12 hours in ethics and California insurance code, and 20 hours in their selected insurance field. California offers more than two dozen license types, with "Accident and Health Agent" and "Life Agent" being popular choices for brokers. Errors & Omission (E&O) insurance is encouraged for all licensed brokers, as it offers greater protection than traditional liability insurance.
It is recommended that consumers shop around for insurance and utilise the services of a fully bonded and qualified insurance broker. Consumers can verify broker bonds and agent appointments by searching for the broker's or agent's name or license number.
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Broker fees
In California, insurance brokers may charge broker fees, but insurance agents may not. A broker fee is a commission paid by insurance carriers for the services of an insurance broker. This commission is then built into the premiums charged to the customer.
The California Department of Insurance (CDI) regularly deals with customer complaints regarding excessive broker fees or the failure to disclose such fees. To remain compliant with California law, insurance producers must use the appropriate forms, obtain the customer's prior consent, and practice transparency.
To act as a broker and charge broker fees, a producer must:
- Be licensed as a broker-agent
- Maintain a $10,000 broker's bond
- Disclose in a written agreement signed by the customer:
- That they are transacting insurance on behalf of the customer
- A description of the basic services that will be provided to the customer
- The amount of the broker fee that will be charged
- That they may receive compensation, directly or indirectly, from an insurer resulting from the customer's purchase of insurance
There are several regulations regarding broker fees that brokers must comply with. For example, the fee must be disclosed at the time of the initial premium quotation. The disclosure and agreement must be printed in English and any other language principally used by the broker to advertise, solicit, or negotiate the sale and purchase of insurance. The disclosure and agreement must be signed or initialled by the consumer and kept for 18 months after the policy expires.
Furthermore, it is illegal for a broker to charge a fee for placing coverage with CARP or the FAIR Plan. Consumers may be entitled to a full refund of a broker fee if the broker acted incompetently or dishonestly, resulting in financial loss.
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Agency relationships
The California Insurance Code defines an insurance agent as "a person authorized, by and on behalf of an insurer, to transact all classes of insurance other than life insurance". On the other hand, an insurance broker is defined as "a person who, for compensation and on behalf of another person, transacts insurance other than life with, but not on behalf of, an insurer". In other words, agents transact on behalf of the insurer, while brokers transact on behalf of the insured.
The distinction between an agent and a broker is important because brokers may charge broker fees, whereas agents may not. This distinction has had increased significance in California following Proposition 103. However, the practical realities of insurance production can sometimes blur the lines between the two roles. For example, a licensed broker may act in a dual capacity, placing insurance (acting as a broker) and collecting premiums and delivering policies to the insured (acting as an agent). In such cases, the broker retains their status as a broker.
It is important for consumers to understand the difference between agents and brokers and to shop around for insurance, utilising the services of a fully bonded and qualified insurance broker. Consumers can verify the status and discipline history of an agent, broker, or another licensee by checking their license.
In some cases, the distinction between an agent and a broker can be further complicated. For example, when an agent/broker posts a particular insurance company on its window or has previously had the authority to bind a company, or when proofs or certificates of coverage are issued by someone other than the actual insurer. If a dispute arises concerning coverage, consumers should consult with counsel familiar with the nuances of insurance coverage, agency, and brokerage.
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Licensing and bonds
The California Department of Insurance offers many license classes for brokers and insurance agents. These include but are not limited to personal lines broker-agent, surplus lines broker-agent, casualty broker, life settlement broker, and insurance adjuster. To become a licensed insurance broker in California, you must be at least 18 years old and have credit. There are no post-secondary education requirements to become an insurance broker in California. However, all applicants must take a certified pre-licensing course that covers ethics, insurance codes and procedures, the California Insurance Code, and more. You may be exempt from some coursework if you are an Accredited Advisor in Insurance (AAI), Associate in Risk Management (ARM), Certified Insurance Counselor (CIC), or Chartered Property Casualty.
To apply for a California insurance agency license, you can log on to Sircon's website and submit an LIC 441-11 form, also called the business entity application form for insurance license, along with other documents. The requirements vary depending on the type of license you're applying for. For example, the LIC 447-31 form is required for surplus lines brokers to show financial responsibility, and the bond amount is $50,000. The LIC 447-54A form lists all the licensed insurance agents employed by your business and the insurance lines each agent or broker is licensed for.
A California insurance broker bond is a financial guarantee that a broker will conduct business ethically and lawfully. It is a contractual agreement between the insurance broker, the California Department of Insurance, and the bond company or insurance company that issues and backs the bond. The full bond amount is $10,000, but you only have to pay a small percentage (the bond premium) to get bonded, which can be as little as $150. Those with good credit can often secure this bond at a rate of 1-5% ($100-$500 for a $10,000 bond with a two-year term). Applicants with credit issues should plan for a slightly higher bond premium of 5-10%.
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Recommendations for consumers
When purchasing insurance, it is important to understand the distinction between an insurance agent and an insurance broker. In California, an insurance agent is defined as "a person authorized, by and on behalf of an insurer, to transact all classes of insurance other than life insurance". This means that an insurance agent acts on behalf of the insurance company. On the other hand, an insurance broker is defined as "a person who, for compensation and on behalf of another person, transacts insurance other than life with, but not on behalf of, an insurer". This means that a broker acts on behalf of the insured or policyholder.
It is recommended that consumers shop around for insurance and utilise the services of a fully bonded and qualified insurance broker. This is because, in California, most consumers buy their personal lines insurance products directly from a name brand insurer. However, the person they are buying insurance from represents the insurer, not the buyer, which can cause problems when there is a claim to be paid. By using a broker, consumers can be sure that their interests are being represented.
When choosing a broker, it is important to verify that they are licensed and bonded. In California, brokers are required to have a license and must post a $10,000 bond before acting as a broker. Consumers can verify a broker's license and bond status through the California Department of Insurance (CDI) website or by using the broker's name or license number on a bond verification website. It is also recommended to review the broker's contract to ensure that it clearly states that the broker is representing the interests of the consumer.
In some cases, a licensed broker may act as both a broker and an agent in the same transaction. This is known as a "dual capacity". In these cases, it is important to understand that the broker is still acting as a broker, even if they are performing some functions typically associated with agents, such as collecting premiums and delivering policies to the insured.
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Frequently asked questions
An insurance agent acts on behalf of the insurance company, while an insurance broker acts on behalf of a policyholder. In other words, agents transact on behalf of the insurer, while brokers transact on behalf of the insured.
Yes, both insurance agents and brokers need to be licensed in California. California has more than two dozen license types, and Accident and Health Agent and Life Agent are among the most popular licenses for brokers. To become a licensed insurance professional in California, 32 hours of education are required.
Yes, in some cases, a licensed broker may act in a dual capacity. They may place insurance (acting as a broker) and also collect premiums and deliver policies to the insured (acting as an agent). However, in such cases, the broker retains the status of a broker.
