Start Here: 5 Things You MUST Know
Broker = represents the CUSTOMER, not the insurer. But a broker CAN become the insurer's agent by estoppel.
"We'll handle your claim" does NOT mean "we'll pay." It is only an acknowledgment of processing.
Reservation of rights letter = unilateral, prevents waiver. Nonwaiver agreement = signed by both parties.
First-party bad faith damages can include compensatory, emotional distress, attorney fees, and sometimes PUNITIVE.
Unfair claim practices acts target the INSURER, not individual adjusters (exception: willful/reckless conduct).
1. Brokers — Representing the Customer
Insurance Broker
An independent intermediary who shops the insurance market on behalf of the customer (the insurance buyer). The broker's loyalty is to the customer, not to any particular insurer. This is the fundamental difference from an agent.
Insurance Agent
Represents the INSURER (principal). Acts on the insurer's behalf. Insurer is responsible for agent's actions within scope of authority.
Insurance Broker
Represents the CUSTOMER (buyer). Shops the market for the best coverage and price. Loyalty runs to the customer.
The Tricky Part: Broker as Insurer's Agent by Estoppel
A broker can sometimes act as the insurer's agent through agency by estoppel. This happens when an insurer's conduct makes it appear the broker has authority to act on the insurer's behalf.
Real-World Scenario: Broker Becomes the Insurer's Agent
The Setup: Jane is an insurance broker. XYZ Insurance sends her blank policy forms, rate manuals, and regularly accepts the policies she writes on their paper.
What Happens: Jane writes a homeowners policy for a customer on XYZ's forms. XYZ later tries to deny the policy, saying "Jane is just a broker, not our agent."
The Result: A court would likely find agency by estoppel. By providing blank forms and consistently accepting Jane's business, XYZ made it look like Jane was their agent. XYZ is bound.
2. Surplus Lines Brokers
Surplus Lines Broker
A specialized broker licensed to place coverage with non-admitted (unlicensed) insurers when coverage is not available in the standard admitted market. They must typically demonstrate that coverage was declined by admitted insurers before placing it with a surplus lines carrier.
Real-World Scenario: Surplus Lines Placement
The Setup: A fireworks manufacturer needs liability insurance, but no admitted insurer will write the policy due to the extreme risk.
What Happens: A surplus lines broker places coverage with a non-admitted insurer (like a Lloyd's syndicate) that specializes in unusual risks.
The Result: The manufacturer gets coverage through the surplus lines market. The broker handles additional filing and tax requirements that come with non-admitted placements.
Key Surplus Lines Requirements
- Must hold a special surplus lines license
- Must demonstrate coverage was declined by admitted insurers first
- Subject to additional filing and tax obligations
- Under the NRRA (2010), the home state of the insured controls taxation and regulation
3. Errors & Omissions (E&O) Coverage
E&O Liability Policy
A professional liability insurance policy that protects insurance producers against claims arising from their mistakes or failures in performing professional duties. Think of it as "malpractice insurance" for insurance agents and brokers.
What E&O Covers
- Failing to procure requested coverage
- Placing coverage with an insolvent insurer
- Failing to advise about coverage gaps
- Making misrepresentations about policy terms
Real-World Scenario: E&O Claim
The Setup: A business owner asks their agent to add an umbrella policy with $2M in coverage. The agent says "I'll take care of it" but forgets to submit the application.
What Happens: Three months later, a delivery truck causes a multi-vehicle accident with $1.8M in damages. The underlying auto policy only covers $500K.
The Result: The business is exposed for $1.3M. The owner sues the agent for negligence. The agent's E&O policy responds to cover the agent's liability for the gap the agent negligently created.
Insurer's Liability for Producer's Acts
Sometimes the insurer becomes liable for the producer's mistakes. Under respondeat superior, if the producer is the insurer's agent acting within the scope of authority, the insurer is vicariously liable.
Example: Agent Tom, acting within his authority as ABC Insurance's agent, incorrectly tells a customer that flood damage is covered under their homeowners policy. A flood occurs and ABC denies the claim. The customer sues ABC directly — and may win because Tom (ABC's agent) misrepresented coverage while acting on ABC's behalf.
4. Claim Representatives (Adjusters)
Staff Claim Rep
Insurer's EMPLOYEE
Works exclusively for one insurer. Most common type for routine claims. Direct employee of the insurance company.
Independent Adjuster
Works for MULTIPLE Insurers
Self-employed or employee of an adjusting firm. Handles claims on contract for various insurers. Often used for catastrophes or remote areas. Self-insured companies would use this type.
Public Adjuster
Hired by the INSURED
Represents the policyholder's interests in a claim against the insurer. Takes a percentage of the settlement as a fee. Works for the customer, NOT the insurance company.
Claim Settlement Authority
Express Authority
Comes from employment agreements, company manuals, insurer memoranda, or supervisor instructions. Example: "You can settle claims up to $10,000."
Implied Authority
When the adjuster reasonably believes the insurer wants them to take a certain action, despite the lack of specific instructions. Based on reasonable judgment.
"We'll Handle Your Claim" Does NOT Mean "We'll Pay"
A claim adjuster telling an insured motorist "We'll handle your claim" is NOT a promise to pay. It is simply an acknowledgment that the claim will be processed. This is a frequently tested distinction.
5. Waiver & Estoppel in Claims
Waiver
The insurer voluntarily gives up a known right. Example: investigating a claim for 6 months without reserving rights when there is a clear coverage defense. The insurer may be deemed to have waived that defense.
Estoppel
The insurer's conduct causes the insured to rely on a representation. Example: telling the insured "don't worry, you're covered" when there is actually an exclusion. The insurer may be estopped from denying coverage.
Protection Tools (Memorize These)
Reservation of Rights Letter
Unilateral written notice from the insurer to the insured. States the insurer will investigate/defend but reserves the right to later deny coverage based on specific policy provisions. Prevents waiver. No insured signature needed.
Nonwaiver Agreement
Signed by both parties. The insured acknowledges that the insurer's investigation does not waive any policy defenses. Requires the insured's signature (unlike the reservation of rights letter, which is unilateral).
Real-World Scenario: Failure to Reserve Rights
The Setup: A claim comes in that may involve an excluded peril.
What Happens: The adjuster investigates for 6 months without sending a reservation of rights letter.
The Result: A court may rule the insurer waived the exclusion defense — even if the exclusion clearly applies. By failing to reserve rights promptly, the insurer loses the ability to deny coverage. The reservation of rights letter is the insurer's most important protective tool.
6. Unfair Claim Practices & Bad Faith
Unfair Claim Settlement Practices Act
A state law (based on the NAIC model act) that sets rules for how insurers and their claim representatives must handle claims. Enforced by the state department of insurance.
Who Gets Sued?
These acts regulate insurers' conduct. The proper defendant is the insurer, not the individual claim representative. The claim rep is NOT a party to the insurance agreement. Exception: A claim representative CAN face personal liability if their actions were willful, intentional, or reckless.
First-Party Bad Faith Lawsuit
A lawsuit by an insured against their OWN insurer for unreasonably denying, delaying, or underpaying a legitimate claim. "First-party" means the insured is suing their own insurer (not a third party).
Compensatory
Actual losses suffered
Emotional Distress
Mental suffering damages
Attorney Fees
Legal costs recovered
Punitive
SOMETIMES awarded
Excess Liability
When an insurer is held liable for an amount exceeding policy limits because the claim representative or insurer acted in bad faith by refusing to settle within policy limits.
Real-World Scenario: Excess Liability from Bad Faith
The Setup: Insured has a $100,000 liability policy. A claimant offers to settle for $95,000 (within policy limits). The adjuster unreasonably refuses.
What Happens: The case goes to trial and the verdict is $500,000.
The Result: The insurer may be liable for the full $500,000 (not just $100,000) because of the adjuster's bad faith failure to settle within limits.
7. Claim Representative Duties
Duties to the Insurer
- Act within granted authority
- Follow company procedures and manuals
- Exercise reasonable care and skill
- Follow supervisor instructions
Duties to Insureds & Third Parties
- Act in good faith
- Investigate claims promptly and thoroughly
- Do not misrepresent policy provisions
- Make fair settlement offers
Company Manuals & the Duty to Follow Instructions
An insurer's manual that sets appropriate procedures for claim management relates to the adjuster's duty to follow instructions. If the adjuster deviates from established procedures, the adjuster (and the insurer) may face liability.
Cheat Sheet
Print this page for quick referenceBrokers & E&O
- Broker = represents the CUSTOMER, not the insurer
- Broker can become insurer's agent by estoppel
- Surplus lines = non-admitted insurers, special license required
- E&O = malpractice insurance for producers
- Insurer vicariously liable for agent's acts within scope
Claims & Liability
- 3 adjuster types: Staff (employee), Independent (contract), Public (insured hires)
- "We'll handle it" is NOT "we'll pay"
- Reservation of rights = unilateral, prevents waiver
- Nonwaiver agreement = signed by both parties
- Bad faith damages: compensatory + emotional + attorney fees + punitive
- Unfair claim acts target the INSURER, not the adjuster
- Excess liability = bad faith refusal to settle within limits
Exam Trap Alerts
1. Agent vs. Broker — Who Represents Whom?
Agent = represents the INSURER. Broker = represents the CUSTOMER. But a broker CAN become the insurer's agent by estoppel if the insurer treats them like one (sending blank forms, accepting their business).
2. "We'll Handle Your Claim" Is NOT a Promise to Pay
This is only an acknowledgment that the claim will be processed. It does NOT bind the insurer to pay. This is a frequently tested distinction.
3. Reservation of Rights vs. Nonwaiver Agreement
Reservation of rights = UNILATERAL (insurer sends it, no signature needed). Nonwaiver agreement = BILATERAL (requires the insured's signature). Send the reservation of rights letter IMMEDIATELY when a coverage question arises — delay can mean waiver.
4. Who Can Be Sued Under Unfair Claim Practices Acts?
The INSURER, not the individual claim representative. The claim rep is not a party to the insurance contract. Exception: personal liability applies if the claim rep's actions were willful, intentional, or reckless.
5. First-Party Bad Faith Can Include PUNITIVE Damages
"First-party" = the insured suing their OWN insurer. Damages include compensatory, emotional distress, attorney fees, and SOMETIMES punitive damages. The word "sometimes" matters — punitive is not guaranteed.
6. Self-Insured Companies Use Independent Adjusters
A self-insured company most likely works with an independent adjuster (not a staff adjuster) because self-insured companies do not have their own claims department.
Quick Reference Summary
Broker
Represents the CUSTOMER. Can become insurer's agent by estoppel.
Surplus Lines Broker
Places coverage with non-admitted insurers. Special license required.
E&O Coverage
Malpractice insurance for producers. Covers professional mistakes.
3 Adjuster Types
Staff (employee), Independent (contract), Public (hired by insured).
Reservation of Rights
Unilateral letter preserving insurer's right to deny. Send IMMEDIATELY.
Nonwaiver Agreement
Signed by both parties. Investigation does not waive defenses.
First-Party Bad Faith
Insured vs. own insurer. Compensatory + emotional + fees + punitive.
Excess Liability
Bad faith refusal to settle within limits = insurer pays above limits.
Unfair Claims Acts
Target the INSURER. Enforced by state DOI. Not individual adjusters.