Why can't an aircraft owner shop among two or three different brokers to get the best quote? What's the scoop on "exclusive quotes" and "broker-of-record letters" and whose interests do they serve? What's the procedure if I'm unhappy with my agent and want to change?

by Tom Chappell and Darrell Hyde

Aviation Insurance can be purchased in two ways: (1) from a "direct writing" company where the insured contacts the company direct; or (2) through an independent insurance agent who represents several companies.

Occasionally, an insurance buyer is asked by an independent insurance agent to sign a "BROKER-OF-RECORD LETTER" (BOR), sometimes called an "AGENT-OF-RECORD LETTER" (AOR). Often there is much confusion about what such a letter is and why it may be necessary. We have seen a BOR issued only to be rescinded later when its meaning and effect was fully understood. We have heard comments such as "unfair trade practices", "restraint of trade", "communist plot", "I don't have to do this with my auto and homeowners insurance", etc.

Our intent in this article is to clear some of the confusion.

First, a few terms as used in this article:

Specialized Field

Aviation insurance is a highly specialized field because of the complex nature of the risks involved, and the relatively small statistical base upon which rates are calculated. Risks are largely "judgment rated" in accordance with a company's overall underwriting standards and philosophy. An individual underwriter usually has a broad range of rating latitude on a given risk and can be influenced by his personal evaluation of a risk.

A knowledgeable agent who has done his homework can, in many cases, negotiate improved terms with an underwriter by clarifying information or offering additional details. For example, if the pilot has marginal experience for the aircraft involved a discussion of the training and checkout procedures planned can be very helpful.

"Exclusive" Quote Basis

With rare exceptions, aviation insurers have traditionally chosen to deal with only one agent on a given risk. They quote on an exclusive basis. The first agent to contact the insurer becomes the exclusive agent of the risk. In the case of a renewal, the agent presently handling the account with the Insurer remains the exclusive agent. Any other agent who subsequently contacts that insurer is precluded from discussing it.

Without this rule, it would be possible for two different agents to contact two different underwriters with the same aviation insurance underwriting company and be given two different quotes on the same risk. Such differences can create confusion with an insured. The agent with the higher quote may accuse the insurer of showing favoritism to the agent with the lower quote. The difference in premiums could be justified by the differences in coverages requested by each agent and the varying extent and accuracy of the underwriting information developed. The details of coverages requested (limits, pilots, uses, geographical areas, etc.) could result in varied quotes on the same risk.

Examples of Confusion

For example, imagine a quote request on a Beechcraft Bonanza, a fairly complex single engine aircraft (six place, variable pitch prop, retractable landing gear, 230 h.p. engine). Imagine one agent aware of the significance of an instrument rating held by the pilot and the other agent not. The instrument rating would be considered a very important factor by underwriters for this type aircraft and the agent confirming this bit of information stands to get a better quote.

On the other hand, an agent who provides underwriters with details of previous losses may get a higher quote, or even a declination, than the agent who fails to provide the information. Any agent who would omit such critical information stands to have the quote withdrawn when the underwriter receives a completed application. If the loss details are not furnished to the underwriters, serious problems could arise in the event of a claim.

Another area which can cause confusing differences in premium quotations is the specific liability coverages being offered, whether from a direct writing company or through an independent agent. Sometimes major differences in coverage are stated with subtle differences in their description. For example:

1. $1,000,000 Combined Single Limit (CSL) Bodily Injury (BI) and Property Damage (PD)
    
2. $1,000,000 CSL BI & PD with passenger BI limited to $100,000 per passenger
    
3. $1,000,000 CSL BI & PD with BI limited to $100,000 per person.

A non-aviation insurance professional may not realize that:

• Coverage #1 provides a full $1,000,000 "level" limit of BI and PD without a restriction on the amount available for any bodily injury claims.
   
• Coverage #2 restricts the amount of protection available for bodily injury to passengers to $100,000 each, but with no further restrictions for persons outside the aircraft who may be injured.
   
• Coverage #3 applies a restriction of $100,000 for any person injured, passenger or not.

Each of these liability coverages would result in different premiums. Rather than put out several differing and confusing quotes on a risk, underwriters prefer to invoke the "exclusive" quoting basis.
 

The Broker-Of-Record Letter (BOR)

A BOR is a written authorization from the insured to an insurer designating a specific agent as the one who is to deal with that insurer on the risk. It is not required of the first agent who contacts the insurer - only subsequent ones. If an insured is dealing with only one agent, the subject may never come up.

When the insurer receives the letter, the first agent is advised that the second agent is now the "exclusive" agent and that no more discussions can be had with the first agent. In fact, if the insurer has quoted the risk to the first agent, the quote is withdrawn and the same quote is then given, exclusively, to the second agent.

The first agent is usually given a few days before the second agent is recognized at the agent of record. This gives the first agent an opportunity to persuade the insured to change his mind When a rescinding letter is written, it usually indicates that the insured didn't fully understand the effects of the BOR in the first place. Insurers don't like to get caught in the crossfire between two agents competing on an account, and tend to lose interest in it if there seems to be confusion as to who is to represent the risk. Most underwriters are reluctant to honor a BOR mid-term.

Not a Legal Requirement

There is no legal requirement for the traditional position taken by insurers regarding a BOR. Ethically, they are bound to follow the desires of the insured as to who will represent the risk. Even if an underwriter prefers one agent to another, he will follow the insured's instructions to deal with the designated agent. The underwriter is also ethically bound to make the same premiums available to the designated agent if the risk has already been quoted. This assumes, of course, the same terms and coverages and underwriting information.

There are times when an agent may ask for a BOR from an insured even though no other agent has become involved in the account. This is especially true of larger, more complex accounts. The proper handling of such an account can require a good amount of the agent's time and efforts. The signing of the letter by an insured usually indicates that he has confidence in the agent. The agent's time and effort won't go unrewarded since he will ultimately place the insurance. The letter indicates to the insurer that they are dealing with the agent who has the insured's authority to represent him.

There are cases where an unauthorized agent will contact a company on behalf of the insured. This kind of contact results in sketchy or assumed underwriting information since the agent hasn't even spoken with the insured. This may occur when an agent learns of a pending aircraft sale and wants to write the business. Although blocking markets without the insureds authority may not be illegal, it certainly is unethical. Because of the unauthorized contact a BOR would be required in such cases if the insured wanted to choose his own agent.

Limited Number of Markets

There are only about twelve sources for aviation insurance in the U.S. today and all are not candidates for every risk. Most risks would be presented to only about half of these markets and, with larger and more complex risks, even fewer than that. When an insured asks two or more agents to get aviation insurance quotes, most often the same insurers will be contacted by each agent. The first one making contact would become that insurers "exclusive" agent.

Appointment Not Irrevocable

A BOR should be treated by an insured as a serious commitment to an agent. He is hiring a new agent. An insured should also realize that the first agent will be advised by the insurer of the change. However, it is not an irrevocable arrangement. In the aviation insurance marketplace, the insured has the final say as to who his agent will be. If he chooses to change his mind, he has the right to do so.

If asked to sign a BOR, an insured should consider the reasons for the request. The requesting agent may be "blocked" from an insurer because another agent contacted them first. The insured can then decide who he wants to represent him to that insurer, and make his decision accordingly.

Example of a typical "Broker-Of-Record Letter"

This one is used by CS&A Aviation Insurance: