Who Does a Wholesale Broker Represent?
The Answer: It Depends.
A recent federal District Court case provides a useful review of how courts answer the question whether an insurance intermediary is acting for the insurer or for the policyholder. As the court observed, the terms “broker” and “agent” as used in the insurance industry are confusing. The answer turns on the facts and the function the intermediary performs.
Although you might expect a wholesale broker to be more closely aligned with the insurer, in this case, where the broker did not have authority to bind the insurer or issue policies, the court held that it acted on behalf of the policyholder for purposes of accepting delivery of the policy.
The policyholder went to a retail broker to purchase a policy. The retail broker, in turn, went to a wholesale broker. The wholesale broker placed the coverage with a surplus lines insurer, which issued a binder. Eventually, the insurer sent the policy to the wholesale broker, which passed the policy on to the retail broker, which provided it to the policyholder.
The ultimate issue in the case, whether the insurer needed to show prejudice in order to disclaim coverage for late notice, involved a recently enacted New York statute. The statute would only apply if the policy was delivered after the statute’s effective date. The wholesale broker received the policy before that date. Was the wholesale broker acting for the policyholder when it received the policy? In this case, yes, the court concluded.
Presumptively, an insurance broker works for the policyholder, and an insurance agent works for the insurer. However, “agent” is also a legal term for one who acts on another’s behalf, so a broker is also an agent, either for the policyholder or the insurer.
The use of one term or the other to describe an insurance intermediary is not determinative. Also, the relationship is not fixed: an insurance intermediary may act on behalf of the insurer in some capacities, and on behalf of the policyholder in others. The fact finder must consider the nature of the relationship between the parties based on the facts of the specific transaction at issue.
In this case, the wholesale broker did not have authority to issue binders on behalf of this insurer, as it did for many of the other insurers with whom it placed business. So while the court found that delivery of the policy to the wholesale broker in this case was effectively delivery to the insured, the outcome might have been different in another case where the wholesale broker had authority to bind coverage.
The case is B&A Demolition and Removal, Inc. v. Markel Ins. Co., United States District Court for the Eastern District of New York, Number 11-cv-0572 (April 18, 2013).
About Harvey: I specialize in Insurance Law and Litigation at Anderson & Kreiger. One of my most recent posts for Between the Lines describes how Facebook, Twitter and the like are changing CGL policies.
Posted In: Agents and Brokers