As financial advisors you wear several hats and address many areas that can have an adverse impact on your clients' financial well-being. And while you may discuss things such as wills, trusts and health, and disability insurance, many of you sell life insurance to help your clients achieve their planning goals. Additionally, almost without exception, advisors at least touch upon property and casualty insurance to varying degrees.

Since life insurance and home, auto and umbrella insurance are necessary foundations to protect your clients' wealth now and in the future, it is imperative that financial advisors have a strong understanding of the duties and responsibilities of both buyers and sellers in insurance transactions.  While in many states different licenses are required to sell different insurance products—such as an L&H license to sell life insurance and a P&C license to sell home, auto and umbrella policies—the duties and responsibilities of those who sell these products are similar. 

A significant part of my business practice over the past decade has been focused on providing insurance litigation support and expert witness testimony. I have been involved in cases for both plaintiffs and defendants,and regardless of the side I am working with, I have observed what courts and/or juries have deemed "negligent" behaviors related to both insurance agents and insurance purchasers. I have seen many positive outcomes resulting from having the proper insurance coverage in place at the time of a covered loss. But I have also seen several negative situations arising from insurance policies that failed to provide needed coverage at the time of loss. 

Recognize that difficulties may arise at the very start of new relationships between insurance agents and clients—during the insurance sales process itself. A frequent reason that insurance coverage problems arise can be traced back to a lack of communication between the buyer of insurance, the "insured," and the person selling insurance, the "agent." Many such communication breakdowns occur because both the insured and the agent fail to fully understand their roles in the insurance sales process. 

It is critical that you recognize that certain general sales characteristics apply to the insurance sales process. As is true in most sales transactions, the ultimate goal is to close a sale. So while insurance agents use different sales pitches and varying degrees of industry jargon when offering an insurance policy to prospects, their primary objective is to sell insurance.

With the exception of certain special circumstances that arise between the insurance agent and insurance purchaser, many state courts have held that insurance agents need only place the insurance order given to them by their customer. Said another way, one of the insurance agent’s primary responsibilities is generally to use reasonable skill and diligence to put into effect the insurance that is requested by their customer, and to act in good faith towards them during this process.  

A major problem related to the insurance sales process is that many insurance purchasers fail to understand their own responsibilities in these situations. Insurance buyers are usually held to be responsible for actions such as:

1. Understanding coverages that are desired and advising their insurance agent of same

2. Choosing limits of insurance for various coverages that are ordered

3. Reading insurance policies, once delivered, to determine whether the insurance coverages that have been requested have actually been provided.

The majority of my clients tell me that they do not adhere to one or more of these three duties.  Rather, they trust that their insurance agent has provided the insurance coverage and limits of insurance that is best for their specific situation. This is problematic.   

Many financial advisors refer their clients to P&C agents because they do not sell these products.  Keep in mind that your reputation may suffer if the agents that you refer clients to do not meet their duties and responsibilities in the insurance sales transaction. Since few of you sell P&C products it may help to explain the P&C sales process using a brief analogy. 

A great number of people buy insurance through the independent agency system where insurance agents sell the products of many different insurance companies. Think of these insurance salespeople as manufacturer’s representatives. The purchaser of insurance (the insured) is the customer and the insurance company providing the insurance policies can be viewed as the manufacturer. 

The job of most manufacturer’s representatives is simply to place their customer’s order with the manufacturer that the customer has chosen; nothing more and nothing less. For instance, reps who sell intricate machines that can be modified by the manufacturer do not likely provide their customer's intricate machine specifications to the manufacturer. Rather, since the customer is in the best position to determine whether or not the capabilities of the machine they are ordering meets their needs, the obligation to provide specifications rests with them. 

While your clients may consider it unfair that one of the primary roles of an insurance agent is to simply put an insurance policy requested by their customer into effect, it is too great a burden to place upon insurance agents to be mind readers. It is not uncommon after a claim is denied for an insured to make statements such as, "I told my agent that I wanted coverage for everything," or "I told my agent that I didn't care how much my insurance policy costs….I said that I wanted the highest limits possible." Of course, these statements and other similar remarks might be true.  But all too often it is left to a mediator, or to a jury, to decide what the truth is in these types of situations based upon the facts presented. 

Advisors understand that court cases are time consuming and costly for all parties. Rather than dealing with problems after a negative outcome is experienced, such as when a claim is not covered, it is always better to try to prevent such situations from occurring. To achieve this goal, both the insurance agent and the insurance purchaser must better understand their respective roles in the insurance sales process. Here are some suggestions to keep in mind when you sell insurance products to your clients or to help you counsel your clients when they are purchasing P&C insurance through an insurance agency:   

• Both parties should ask questions and provide information to the other side. Your clients, the insureds, should ask their insurance agent to slow down when necessary and to provide additional information when their agent is running through questions too quickly.

• Your client must clearly tell the agent what coverages they are interested in buying and what limits of insurance they wish to purchase. 

• If clients are unsure of anything, ask the agent for help. 

• Clients should take written notes and ask for copies of all applications that are completed.

• Both parties in the transaction must communicate fully and honestly. Holding back pertinent information or answering questions incorrectly may prevent a future claim from being paid.

• If the answer to a question is not fully understood by either party, ask for clarification and/or for an example until the answer provided becomes clear.          

Financial advisors must recognize that everyone plays an important part when insurance is purchased and that your clients need to be informed and educated decision-makers. As insureds, they must embrace their responsibility to have a general understanding of insurance coverages and to recognize potential problems associated with the limits of insurance that they choose. It is also important that they ascertain whether coverages and limits of insurance requested have in fact been delivered by reviewing their issued insurance policies. If unwilling or unable to meet their duties in this regard, your clients should seek assistance from other professionals, such as insurance consultants, who can help them meet their duties and responsibilities in the insurance buying process.

A final word of caution: Differences in insurance agent duties and responsibilities can exist based on a variety of factors, including variances in state laws and your specific situation.  Therefore, please consult with your attorney if you have questions in this important area.   

Kevin L. Glaser, CPCU, CIC, SCLA, ARM, AAI, AIC, ARM-P, AIS, is a nationally recognized speaker on the topics of insurance and risk management and the president of Risk & Insurance Services Consulting LLC and Right Side Creations LLC. Glaser is also the author of Inside the Insurance Industry—3rd Edition.