In the looking-glass world of professional liability claimsagainst insurance agents and brokers, words that we take as clearcan become unrecognizably twisted and fraught with ambiguity.Perhaps no word suffers this indignity more frequently than“agent.”

In the insurance industry, an “agent” is commonly understood tobe a person who transacts insurance by the appointment of, and onbehalf of, an insurance carrier. California law exempts from thisdefinition life, health and disability insurance and “life agents,”a separately defined term. (Cal. Insurance Code ?? 1621 and 1622.)In contrast, “An insurance broker is a person who, for compensationand on behalf of another person, transacts insurance other thanlife insurance with, but not on behalf of, an admitted insurer.” (?1623)

At this point the agents and brokers reading this column aregroaning a collective, “Duh! You've practiced law for 28 years andthat's all you learned?” But you'd be surprised at how complex theinsurance-world term “Agent,” which I capitalize, becomes when itsmeaning gets mixed up with its Bizarro-world doppelganger, “agent,”in statutes and legal decisions: “An agent is one who representsanother, called the principal, in dealings with third persons. Suchrepresentation is called agency.” (California Civil Code ?2295)Thus, an insurance broker is an “agent” of the policyholder, thoughhe or she may or may not also be an agent or Agent for the insurer.In fact, for some limited purposes, such as transmission of theinsurance premium, a broker is legally deemed to be an “agent” ofthe insurer.

Imagine a lay jury hearing the following testimony in aninsurance broker E&O trial, and without benefit of thecapitalization of “Agent” when it's used in the insurancesense:

Dirk Smarmly, lawyer for the plaintiff: Ms. Lopez, were youassisting my client, Fred Hapless, in obtaining insurance for hisbusiness in 2007?

Lopez: Yes. I was.

Smarmly: And in doing so, you were acting as Mr. Hapless' agent,correct?

Lopez: No. I wasn't an Agent.

Smarmly: Then tell me, Ms. Lopez, who represented Mr. Hapless inthe 2007 insurance transaction?

Lopez: I did. Tom Mittleman was the Agent.

Smarmly: So, Mr. Mittleman and you were both the agents for Mr.Hapless?

Lopez: No. Mr. Middleman was the Agent.

Smarmly: Then did you represent the insurer, Secure FutureIndemnity?

Lopez: No. I'm not an appointed Agent.

Smarmly: So you represented no one?

Lopez: I represented Mr. Hapless.

Smarmly: But not as his agent?

Lopez: Exactly.

Judge Knott: We'll take a 10-minute recess and I'll take twoaspirin.

This sort of “Who's on First?” routine can be a point ofconfusion even inside the industry. Sometimes insurance insidersforget who represents whom. In July, the Connecticut InsuranceCommissioner fined a prominent insurer $434,000. The Commissionerfound, among other things,

[T]here were consistent violations related to instances ofunlicensed adjusters and agents not appointed. In Connecticut,insurance companies are required by law to formally appoint andregister with the state all agents who sell insurance products ontheir behalf. When combined, [Company] and its subsidiaries had 55instances where agents were not appointed and 93 instances whereindividuals acted as a casualty adjuster without being licensed inaccordance with Connecticut law.

Although the faux “Agents” were not individually fined, thesituation could have led to results more dire than a stiff fineagainst the insurer and a tongue-lashing in a press release. Let'schange the facts. Let's assume that a faux “agent” purportedlybinds coverage on a hypothetical carrier's behalf on Tuesday, thata loss under the policy occurs and is reported on Wednesday, andthat a denial of coverage is issued on Thursday (very promptly, Imight add) because the policy was not properly bound. Not a prettypicture, is it?

We can make the facts less drastic: the “agent” purports toconfirm coverage with a higher limit than real “Agents” of thecarrier are authorized to bind; the carrier decides to honor theclaim, but only up to the limit that a true “Agent” could havebound, telling the “agent,” in so many words, “You make up thedifference.” We could term this scenario “Dirk Smarmly's FondestDream,” with two solvent defendants vigorously pointing theirindex, or other, fingers at each other, and the local, electedCommissar of Insurance and Cosmetology issuing damningpronouncements aimed at both of the future defendants.

Fanciful? Yes. Exaggerated? Yes. Could never happen? If youthink these things never happen, write a letter to American Agent& Broker and tell us why. I'll reserve my entire next quarterlycolumn for excerpts from the responses to that letter.

The fact is that there is no coherent system of stateappointment requirements for insurance producers, by any othername. According to a survey by the National Assn. of InsuranceCommissioners (NAIC) with the ponderous title, “Producer LicensingAssessment: Aggregate Report of Findings,” dated Feb. 19, 2008,there are 25 jurisdictions that “require business entities to beappointed. In addition, six states require each branch location ofa business entity to hold an appointment. In 15 states theappointment of a business entity eliminates the requirement foreach individual producer working for that business entity to holdan appointment with the insurer.”

In short, there are only 46 states in the Union, according tothe NAIC (25 + 6 + 15), which underscores why an interstate–andinternational–business such as selling insurance on behalf of acarrier just might better be regulated through a uniform set ofregulations or (shudder) the federal government.

But before we get to the Epiphany of the Proletariat, let's lookat the simple grass roots solution. Business people in any businessneed to know who their customers are, and to whom they owe dutiesof care. If I were an insurance “Agent” in one of those states thatrequires each office of an insurance producer to hold a separateAgency appointment, I'd be concerned about working out of anotherbranch office in the same state while traveling on abusiness/fishing trip. Chances are that my state doesn't recognizeappointment of my business entity as automatically appointing eachperson employed by the entity. So, when I meet with my buddy whiletraveling on said business/fly-fishing trip to the Humblevilleoffice, which isn't appointed, and I ask him, “Say, have you everthought about a personal umbrella policy?” am I violating the lawor am I telecommuting from my own office in Centerville?

These are difficult questions, the sort that underpaid publicservants and 12 good citizens off the street are normally calledupon to answer.

Know whose interests you serve, and whose you are allowed toserve. Returning to our original theme of children's literature,the question is simply stated by Humpty Dumpty, “The question is,which is to be master–that's all.”

He was a good egg.