Insurance Broker Certification Practice Exam

What does the law of agency define?

1. The relationship between the insurer and the insured

2. The responsibilities of the insurance company

3. The relationship between the principal and the agent

4. The types of insurance policies available

The correct answer is: The relationship between the principal and the agent

The law of agency is a legal doctrine that establishes the relationship between a principal and an agent, where the agent is authorized to act on behalf of the principal in specific matters. In the context of insurance, this typically refers to how agents represent insurance companies (the principals) to the public. The agent has the authority to enter into contracts, make decisions, and bind the principal to certain obligations, all of which must be done within the scope of authority granted by the principal. Understanding this relationship is critical in the insurance industry because it governs how transactions are conducted and influences the duties an agent has towards both the insurer and the insured. For example, an agent must act in the best interests of the principal while also adhering to fiduciary responsibilities to clients. The other choices deal with different aspects of the insurance framework: the relationship between the insurer and the insured pertains more to the contract of insurance itself, the responsibilities of the insurance company address its duties towards policyholders and compliance with regulatory bodies, and the types of insurance policies available are a matter of market options and design rather than the legal agency relationship.