Why Every Insurance Broker Needs A Basic Understanding Of Contract Law by crosscomplaint.com© 2012 Copyrighted Materialwww.crosscomplaint.com Insurance brokers sell contracts in the form of insurance policies along with oral or written agreements with customers they serve or solicit everyday. Unfortunately, most brokers have very little to no understanding of the basics formation of contract and it's impact on their daily lives. If they did know the basics, there would probably be fewer insurance agents being dragged into court for negligence and breach of contract. It doesn't matter if you're an agent, broker, owner, or account manager--you must understand the basics of contract law to avoid errors and omissions claims and potential litigation. All it takes is one lawsuit against your insurance agency to learn the significance of contract law. If you're not concerned--you should be.

Resources For Insurance Brokers On Contract Law:● Wikipedia● Amazon● Cornell University Law School

Basic Understanding Of Contract Law For Insurance Brokers And CustomersThere are several components or factors involved when you're a broker working with potential customers. The first factor is an agreement--written or verbal between yourself and a customer. However, it's important insurance brokers understand the concept of "mutual assent." Do you want to engage in a business transaction with this customer? Are you on acting like you're interested in their business, but your thoughts are the opposite? It's important to be clear with yourself--do I want to do business with them or not. Your actions matter more than your thoughts. Most insurance brokers fail to use a written contract that specify the terms and conditions of their relationship. Consequently, most insurance broker and customer relationships are formed through emails and oral agreements. The interaction tends to focus on price and little on coverage and policy language. This is a mistake or trap brokers fall into with customers. They don't realize there might be other concerns with the customer like the coverages, policy language or exclusions. The broker failed to ask the customer--besides the price--what else is important to you? Insurance brokers and agency owners--do not step into this trap with customers who might know more about contract law than you! The smart

customer will have documented the interaction with the broker in case a claim happens and they need to prove their point in court. Key Points On Agreement Between The Insurance Broker/Agency And Customer

● Contracts are formed when the insurance broker and customer have agreed verbally, in writing, or through their actions they would like to conduct business with each other

● Brokers--you have a choice on if you would like to engage or conduct business with a potential customer. If you don't want to do business with someone--consider addressing it early not later.

● Brokers--don't fall into a customer trap of selling only on price. Find out other concerns they might have such as policy language, exclusions etc.

The second factor in contract law as applied to insurance brokers is promises. Have you made any promises in writing or verbally with your potential customer? Promises might include our agency will call you if your late on your insurance premium. Insurance brokers must remember their actions are like promises. If you're calling a customer every month for being late--your actions could be considered an "implied" promise. The one month you forgot to call your client and the policy cancels after it was discovered because of a claim--you or your agency could be held liable. One promise means a contract has been formed. Key Points On Promises:

● One promise in writing, verbally, or through actions equals contract formation● Insurance brokers--be careful and aware of your promises● Don't make promises your insurance agency cannot keep!● Promises made have serious consequences to customers relying on those commitments

The third factor is the broker and customer are involved with each other to exchange products, services and money. The broker might be providing service through sound advice on coverages, carrier selection, and policy language. The customer is providing money or premium payments to receive financial protection and "peace of mind" their business can operate accordingly. Key Points On The Relationship Of Exchange Between The Insurance Broker And Customer :

● Premium is paid by the customer in exchange for what's been agreed with the insurance broker

● There is a trade between the broker and customer The final factor in contract law is the recognition it has become legally enforceable. If the broker breaks or "breached" the contract they've formed with the customer, the consequences might include legal ramifications. Many lawsuits against insurance brokers and agencies are a direct result of behavior "gone wild" with brokers who decide to push the limits. The broker cuts corners with the carrier or misrepresents critical information with the customer. An insurance claim is denied and forces the customer to file a lawsuit against the insurance carrier and broker seeking the truth since the claim has become a complex mess. The bad behavior contaminates the entire claim process from ever having a legitimate means to be settled fairly.

Key Points On Legal Enforceability

● Legal consequences because the broker and customer have an enforceable contract--specific enforcement or compensatory damages

● Behavior such as fraud and misrepresentation will ruin the integrity of the claims process--don't do it

The poor economy and rise in litigation is forcing brokers to become armed with legal weaponry and acting more like attorneys to survive. There appears to be little to no refuge for brokers to seek assistance from the carriers they represent. Insurance carriers are silent with helping their agents and brokers on these legal issues and have used litigation to "teach" brokers and agency owners valuable lessons. It is more important than ever brokers obtain the knowledge and skills they need to succeed. Understanding the basics of contract law will help insurance brokers and agencies confront increasingly complex issues and challenges.

© 2012 All Rights Reserved by crosscomplaint.comThis article is meant for education and information purposes exclusively. The author is not an attorney and does not provide legal advice. Insurance agencies and brokers should seek legal

advice from a competent attorney located in their state.