In dealing with PRC related insurance disputes, one question is often raised by Chinese court or arbitration institute: what is the insurance agent or the insurance broker? The relationship between the insurance agent, broker, insurer, policyholder, insured and beneficiary always confused the judge and arbitrator. This article will elaborate the concept, function, difference of these two parties in the framework of PRC insurance law.
Definition and Characteristics of the Insurance Agent and the Insurance Broker under the PRC Law
i. Definition and Characteristics of the Insurance Agent
Article 117 of the PRC Insurance Law stipulates that “an insurance agent means an entity or individual that has been authorized by an insurer to conduct insurance business on its behalf within the scope authorized by the insurer and collects commissions from the insurer. Insurance agencies include professional insurance agencies specializing in the insurance agency business and agencies concurrently engaged in insurance business.”
Article 2 of the Provisions on the Supervision of Insurance Agents stipulates: “For the purpose of these Provisions, ‘insurance agents’ refer to institutions or individuals that are entrusted by and receive commissions from insurance companies to handle insurance business on behalf of the insurance companies within the scope authorized by the insurance companies, including professional insurance agencies, agencies concurrently engaged in insurance business and individual insurance business.”
Based on the above definition and relevant provisions under the PRC laws, insurance agents under the PRC laws have the following characteristics:
Firstly, an insurance agent shall conduct insurance agency activities on behalf of the insurer. The tasks of an insurance agent include to sell insurance products and collect insurance premiums on behalf of the insurer, to conduct damage survey and claim settlement for the relevant insurance business in accordance with the authorization of the insurance company, etc.. The legal effect of the representation made by the insurance agent in the name of the insurer (principal) shall be directly assumed by the insurer.
Secondly, an insurance agent shall conduct insurance activities within the scope authorized by the insurers. In accordance with Paragraph 2, Article 127 of the PRC Insurance Law, if an insurance agent without authorization, beyond authorization, or whose authorization has expired enters into a contract on behalf of the insurer, and the policyholder has a reasonable reason to believe that the insurance agent has authorization, such agency act of the insurance agent shall be valid. The insurer may pursue the responsibility of the insurance agent who exceeds his authority according to the law, but until then, the insurer must still perform and bear the corresponding contractual obligations according to the contract.
Thirdly, the legal consequences of an insurance agent’s agency activities are borne by the insurer. The expression of intent received or made in the name of the insurer has direct legal effect on the insurer. This is embodied in the following aspects:
(a) Information about the subject matter of the insurance that is known to the insurance agent shall be deemed to be known to the insurer. After the insured has informed the insurance agent of the circumstances relating to the subject matter of the insurance, even if the insurance agent fails to convey or accurately convey the information to the insurer, the insurer shall not later claim the cancellation of the insurance contract or deny the insurance liability on the grounds that the insured has violated the obligation of truthful notification. The information known by agent could be deemed as the input information of insurer.
(b) If an insurance agent gives an incorrect explanation or answer as to whether a matter is material enough to influence the insurer’s decision whether to agree to underwrite the insurance or to increase the premium rate, the insurer may not later claim cancellation of the insurance contract on the grounds that the policyholder failed to fulfill its duty to inform of the aforementioned matter.
(c) After the insured has paid the premium to the insurance agent, the premium is legally deemed to have been received by the insurer even if the insurance agent has not yet forwarded it to the insurer or does not want to forward it to the insurer.
(d) In practice, there are often cases where the insurance agent fills in the proposal form instead of the insured. If the insurance agent fails to accurately record the insured’s information, or if the insurance agent intentionally makes a wrong record in order to obtain commission, the insurer cannot claim exemption from insurance liability on this ground unless the insured knows or should know that the aforementioned circumstances exist.
Fourth, individuals can act as insurance agents. But now in practice, all individual agents should register within the insurance agency company, and we hope individuals can practise business by themselves in the future.
ii. Definition And Characteristics of the Insurance Broker
Article 118 of the PRC Insurance Law stipulates that “An insurance broker is an entity that, based on the interests of the insurance applicant, provides intermediary services between the applicant and the insurer for the conclusion of an insurance contract and receives a commission therefore in accordance with the law.”
Article 2 of the Provisions on the Supervision of Insurance Brokers provides that: “Insurance brokers as used in these Provisions refer to institutions that provide intermediary services for the conclusion of insurance contracts between the policyholder and the insurance company based on the interests of the policyholder, and collect commissions according to law, including insurance brokerage companies and their branches.”
Based on the above definition and relevant regulations under the PRC laws, an insurance broker under the PRC laws has the following characteristics:
Firstly, the insurance broker works for the benefit of the policyholder. The task of an insurance broker is to provide the policyholder with the conditions for the conclusion of an insurance contract or to act as an introducer for the conclusion of an insurance contract. Providing the conditions for the conclusion of an insurance contract means that the insurance broker creates the opportunity for the conclusion of an insurance contract by finding a suitable insurer or type of insurance for the policyholder in accordance with the policyholder’s instructions.
Secondlyly, a percentage of the premiums collected by the insurer is taken as a commission for the insurance broker. For certain specific engagements (such as making insurance claims), the insured normally pays the insurance broker a mutually agreed remuneration. But generally speaking, Chinese policyholders seldom pay any service fee to broker.
Thirdly, an insurance broker’s range of business is wide. It is not limited to the insurance selling process, but involves participation in negotiations with the insurer during concluding the insurance contract, assistance with making insurance claims, insurance products consulting, risk management consulting, among others.
Fourthly, an insurance broker can only be an institution, not an individual.
iii. Differences Between The Two Insurance Intermediaries
Comparing the concepts of an insurance agent and an insurance broker under PRC law, the main differences between the two intermediaries are as follows:
(a) Different forms of organization. Insurance agents can exist as companies or individuals (in practice, now China regulator only permit agency companies to process agency business), while insurance brokers can only exist as “limited liability companies” or “joint stock companies”.
(b) Different legal status. An insurance agent is the agent of the insurer, and represents the interests of the insurance company by introducing insurance coverage and underwriting business for the latter; an insurance broker is the agent of the policyholder, insured and beneficiary (currently, there are different opinions in judicial practice; some courts consider it as intermediary services, while other courts deem it as the agent of the policyholder, insured and beneficiary).
(c) Different functions. The main functions of an insurance agent are to promote insurance products for insurance companies, collect premiums, and act as an agent for loss investigation and claim settlement of relevant insurance business according to the authorization of insurance companies, etc. The main functions of an insurance broker are to conduct insurance business consultation and solicitation, risk management and arrangement, market inquiry and quotation, loss claim and recovery, etc.
(d) Different ways of payment of commission. The insurance agent receives the commission directly from the insurer; the insurance broker normally accepts the insured’s commission to handle the insurance procedures, and receive the brokerage commission from the insurance company as agreed with the insurance company. But in PRC practice, both agent and broker receive their commission or fee from insurer, and this phenomenon confused outsiders sometimes.
In summary, an insurance agent is usually “taking the product to the customer”, while an insurance broker is generally “selecting the product for the customer.”
Reasons for Distinguishing theInsurance Agent and the Insurance Broker under the PRC Law
There may be several underlying reasons for distinguishing the insurance agent and the insurance broker under the PRC Law:
Firstly, following the established tradition of civil law systems may be one of the reasons. Insurance laws in Taiwan area and Germany both make a distinction between the concepts of insurance agent and insurance broker.
Secondly, another reason may be for the purpose of maintaining the balance of contracting and performance capacity between the parties to the insurance contract. While the insurer expands its business capacity through the participation of the third party — the insurance agent, in order not to cause further negative impact on the insured who are already in a disadvantaged position, the legislator urgently needs to introduce another kind of subject opposite to the insurance agent, expecting this kind of intermediary to use their insurance expertise to provide some kind of support to the insured, so as to correct the imbalance of interests between the parties to the insurance contract.
Thirdly, it is a natural product of the development of the insurance market. On the one hand, the insurer needs the help of an intermediary to promote its own insurance products. Therefore the insurance agents on behalf of the insurance company emerged. On the other hand, as the insurance market continues to develop, insurance products become more abundant and the demand for insurance continues to increase. The insurance applicants need to use the power of insurance professionals to help them find the most favourable and appropriate insurance products, so insurance brokers representing the interests of policyholders emerge. As a result, two distinct roles have emerged.
Judgment Criteria for the Distinction between Insurance Broker and Insurance Agent in PRC judicial practice
The criteria for the People’s Court to determine whether an insurance intermediary constitutes an insurance agent or an insurance broker mainly include whether a corresponding written contract has been signed, the organizational form of the party, the characteristics of the past transaction pattern, the payment method of commission, etc., which ultimately often requires a specific analysis in conjunction with the circumstances of each case. For example:
The Zhejiang High People’s Court in Case (2020) Zhejiang Civil Final 1291 found that “Chen Xiao and He Xinyun, as individual persons, met the requirements of the Insurance Law regarding the subject of insurance agents. According to the facts identified, the business model of Chen Xiao and He Xinyun applying for insurance business from PICC Taizhou Branch in the form of WeChat group already existed before the insurance business involved in the case, and PICC Taizhou Branch did not review the identity and authority of Chen Xiao and He Xinyun in each business, but directly conducted quotation and information entry for the insurance business submitted by Chen Xiao and He Xinyun. According to Xu’s statement, PICC Taizhou Branch may pay commissions to Chen Xiao and He Xinyun for the successful business. In this case, although there was no written commission contract between Chen Xiao, He Xinyun and PICC Taizhou Branch, the insured He Hong completed the insurance and payment directly to them, and PICC Taizhou Branch also approved the establishment of the employer’s liability insurance contract with He Hong afterwards, which is the recognition of the legal effect of the behavior of Chen Xiao and He Xinyun by PICC Taizhou Branch. In summary, Chen Xiao and He Xinyun should be found to be the insurance agents of PICC Taizhou Branch and not the insurance brokers of He Hong.”
The Weihai Intermediate People’s Court in Case (2021) Lu 10 Min Final 1603 found that “the business scope of Xinshan Insurance Agency Company mainly includes the agent sales of insurance products, etc., and at the same time, combined with the description of the witness Qiao, the company is to obtain the sales channels of insurance products provided by different insurance companies, and then sign on behalf of individuals or enterprises who have the intention to purchase insurance product, so it should be regarded as the insurance agent. Although there are relevant inquiries in the inquiry list set by Huatai, the agent of the insurance company did not actually make inquiries to the policyholder, and the consequences of the act cannot be attributed to the policyholder, but should be borne by the insurer, i.e. Huatai.”
In summary, there is a distinction between the concepts of insurance agent and insurance broker under PRC law, and this distinction will have a direct impact on the policyholder’s obligation to truthfully disclose the relevant information to the insurer, the specific performance of the insurer’s obligation to indicate and explain the exclusion clause, and the implementation of the principle of prudent underwriting by insurance companies, among others.