Generally speaking, when you buy direct you cut out “the middleman” – a retailer who buys wholesale from a manufacturer. They mark up the product’s price and sell it to you.
In this day and age there are plenty of “direct writer” insurance companies out there. These companies “cut out the middle-man” by selling direct to you, rather than through an agent. However, while you may think you are saving money by going direct, that typically isn’t the case. Moreover, by dealing direct with an insurance company, a consumer takes on a level of risk that they may not realize even exists.
That Was Then…
Traditionally, insurance companies did not sell to the public. Instead their products were offered to consumers by “agents” who had to be professionally licensed to deal directly with the public. Consumers actually paid the agent nothing because it was the insurance company who paid the agent a commission, and this commission was not added to the retail price.
This Is Now…
The agency system is still in place throughout the U.S. You can find hundreds of independent agents in your telephone book or internet guide. However, thanks to the internet you can also go directly to many insurance companies and get a quote. If you like the quote you can often buy a policy by filling out forms, right on the spot.
Calling the retailer an agent is not an accident. The insurance agent is actually your legal representative – your agent – to the insurance company. The agent is licensed by your state and carries with them the fiduciary responsibility to be your advocate. They must put your interests first over and above their own, or the insurance company. Even though the agent is paid by the insurance company, they work for you.
An independent agent can do important things for you:
Agents have the ability to quickly check prices and coverages with dozens – if not hundreds – of different insurance companies. Since rates vary widely an independent agent can very likely get you a better deal than you can get for yourself. They can even get you insurance from a ‘direct writer’ like you could get for yourself.
Independent agents are a one-stop-shop for all of your insurance needs. An agent typically doesn’t sell just auto insurance. They also sell homeowners, renters, health and life insurance, business insurance etc. Use them – at no cost to yourself – to handle all of your insurance in one place.
Insurance is a complicated subject. Its an agent’s business to understand it, and communicate it to you so you understand it as well. In almost all cases an ordinary consumer will benefit from having someone who deals with this subject for a living advise them on a 50+ page contract. If there are any hidden surprises, a licensed agent is the one equipped to know where they are. Even if you understand insurance thoroughly you can get tripped up: The industry is regulated on a state-by-state basis. Move from one state to another and you’ll find that the coverages may look the same at first glance, but on closer examination things work a bit differently (very differently, in some states).
Coverages don’t just vary from state to state … they vary from company to company within the same state. Many companies use what are known as ‘manuscript’ policy forms (form = contract in insurance jargon). These forms don’t necessarily use industry-standard wording and may contain altered provisions that materially affect you in some way… some unknown way if you don’t have an expert advisor who is already familiar with a particular policy’s quirks.
The above is the good news with regard to what an agent can do for you. What about the bad news? Even the bad news has some good news inside of it for the consumer: If an agent makes a mistake (such as selling you an insurance policy that is supposed to meet your needs but doesn’t), that agent may well be liable to you for malpractice; something known in the industry as Errors & Omissions. Your insurance agent has an Errors & Omissions insurance policy, just like a surgeon has a malpractice insurance policy. Your lawyer can file suit against the agent – and their malpractice insurance – to recover damages you suffer as a result of a failure to act properly in your interests. Its no fun to think about for the agent or the consumer, but as unpleasant as it is for all concerned, this is a layer of protection that a consumer enjoys when working with an agent.
Which brings us to another problem that you create when you go direct. You have no licensed, regulated insured agent acting on your behalf. You are now taking full responsibility for your coverage decisions, and for any mistakes you may make. No more safety net.
Don’t get us wrong… There is nothing wrong with direct-writer insurance companies. However, if you deal with an agent, there are certain services and protections you are going to get that a direct-writer insurance company simply cannot provide.