What’s the Difference Between an Insurance Agent and Insurance Broker?

“As a business owner, should I use a broker or an agent?” The answer to that questions largely depends on you.

The line that separates the difference between an agent and broker is a blurred one. Both an agent and a broker have the ability to solicit insurance quotes that will adequately protect your business, but the way they go about it is a little different.

Insurance Agent

An insurance agent is a person who has entered into an ‘agency contract’ with an insurance company for the purpose of selling insurance for that company. An agent is not an employee of the insurance company, but rather an independent contractor. The agent, unlike a broker, has the authority to bind coverage (legally obligate the insurance company to provide coverage according to the terms and conditions as bound).

An agent that hires more than one person to service their policyholders is called an agency. An agency consists of two or more people, usually a combination of licensed individuals along with support staff.

Large agencies may have an agency contract with more than one insurance company. However, keep in mind that an agent is a representative of the insurance company, therefore premium payments made to the agent is equivalent to remitting payment to the insurance company.

Agents must successfully pass their state’s Property Casualty licensing exam in order to conduct business as an agent.

Types of Agents:

  • Exclusive Agent: An exclusive agent solicits business for placement with the particular insurance company they have an agreement with.
  • Non-Exclusive Agent: A non-exclusive agent has agency contracts with more than one insurance company. Realize, however, no matter which company they use to insure your business, they still represent the insurance company.

Insurance Broker

An insurance broker is a person or firm that has permission to seek insurance quotations for an insured (client) or prospective client. A broker is not an insurance company employee. As a representative for the insured, brokers will approach several insurance companies in an attempt to provide quotations and coverage to adequately insure the client’s exposures.

The broker will ascertain the client’s needs, gather information and submit the information to several insurance companies. Brokers do not have the authority to bind coverage. They present the information and if the insurance company agrees, the insurance company will bind the coverage.

Once the coverage is bound, the insurance company, not the broker, will issue evidence of coverage in the form of a binder. A binder is an insurance summary that outlines the coverage limits, terms, conditions and premiums that the company agrees to provide.

The broker’s fee, or commission is built into the insurance premium. The client is fully aware of how much their broker earns as the broker must disclose their commission to and get written consent from their client.

Large insurance brokerage firms have the ability to secure coverage for every type of risk. They tend to compartmentalize the coverage to provide experts in each field of insurance. For example, larger firms have departments to handle aviation risks while their counterpart can handle workers compensation.

Smaller businesses may not require the level of compartmentalization and specialization that larger brokerage houses offer. To that end a smaller brokerage firm or an individual broker may be adequate for their needs. They also have the ability to offer a more personalized service that a small business might prefer.

To become an insurance broker, an individual must successfully pass their state’s Property Casualty licensing exam.

Both agents and brokers must pass the same licensing exam in order solicit or sell insurance, but their point of allegiance differs. One represents the client and the other the insurance company.

About the author: Felicia A. Williams is a former insurance broker who is now a freelance writer.

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