Insurance Agents: The Unauthorized Practice of Law

August 16, 2011

Over the years, I have conducted a number of workshops for insurance agents dealing with insurance certificates, construction contract review of insurance specifications, and review of policy provisions. Invariably, an agent will raise a question or concern as to whether or not an agent is practicing law if he or she were to advise a policyholder about potential liabilities arising as a result of insurance requirements contained in construction agreements. As I have discussed this issue with agents, they seem to be under the impression that reading the insurance requirements/specifications in a construction agreement, and then advising the agent’s customer, the contractor, as to whether or not coverages are available, somehow or another constitutes the practice of law. As they are not licensed attorneys, they tend to shy away from this activity.

The fact of the matter is that an insurance agent is routinely engaged in interpreting and construing contracts, and advising clients accordingly. When a customer comes to an agent requesting coverage for his or her business, the agent must make a determination as to the potential risks associated with that business, and make a further determination as to what appropriate coverages are available in the marketplace. This means that an agent has to understand insurance policies and the coverages they afford. Agents have the ability to bind their companies to a risk, to issue endorsements and to do other things which arguably could be considered the practice of law. However, I do not view these tasks to be the practice of law. Rather, these are tasks normally required of a licensed intermediary. Section 628.02, Wis. Stats., defines an “intermediary” as a person who does any of the following:

  • Solicits, negotiates or places insurance or annuities on behalf of an insurer or a person seeking insurance or annuities
  • Advises other persons about insurance needs and coverages (emphasis added)

The statute specifically allows licensed agents to advise risks about their needs and coverages, which invariably involves reading and interpreting contract provisions. This is not the practice of law. Rather, this is an activity that an “intermediary” must engage in as a matter of course.

In June of 2010, the Wisconsin Supreme Court adopted a rule which defined the practice of law in the State of Wisconsin and regulated the unauthorized practice of law. The rule seeks to “protect the public from potential harm caused by the actions of non-lawyers engaging in the unauthorized practice of law.” This new rule, which took effect January 1, 2011, will undoubtedly have impact in a number of areas. The question is whether or not the “business” of a licensed insurance agent constitutes the practice of law.

The practice of law is defined as: “[…] the application of legal principles and judgment with regard to the circumstances or objectives of another entity or person(s) where there is a client relationship of trust or reliance and which requires the knowledge, judgment and skill of a person trained as a lawyer.” The rule lists specific activities that would constitute the practice of law including:

  • Giving advice or counsel to others as to their legal rights or the legal rights or responsibilities of others for fees or other consideration
  • Selection, drafting or completion for another entity or person of legal documents or agreements which affect the legal rights of the other entity or person(s)
  • Negotiation of legal rights or responsibilities on behalf of another entity or person(s)

So far, the definitions are pretty general. In fact, giving those definitions a broad application would probably result in most insurance agents engaging in activities which would fall within the practice of law. Fortunately, that is not the case. The rule also sets forth a number of exceptions. A license to practice law is not required for a person engaged in certain specified activities within the state, “[…] regardless of whether these activities constitute a practice of law.” For example, acting as a lobbyist does not constitute the practice of law. Serving as a mediator, arbitrator, conciliator or facilitator is not the practice of law. There is a substantial exception available that applies to the insurance industry. An entity or organization “[…] in the business of insurance guarantee or indemnity or the provision, sale or marketing of insurance or financial products or services permitted to be offered by insurance companies […]” under applicable statutes, is not engaged in the practice of law. The most important exemption that is available to insurance agents is the exemption relating to individuals “[…] licensed under ch. 628, stats., when conducting their insurance business […]” Agents are licensed under Chapter 628 of the Wisconsin Statutes as “marketing intermediaries.” The foregoing language indicates that licensed agents when “conducting their insurance business” are not engaged in the practice of law. Examples of insurance business activities which do not fit the definition of practice of law include:

  • Investigating or adjusting claims against the insured
  • Negotiating with other persons or entities
  • Conducting loss control functions
  • Underwriting business
  • Selling insurance or financial products or services permitted to be offered by insurance companies under applicable law, or providing advice and counsel with respect to such insurance or financial products or services
  • Preparation of releases or settlement agreements
  • Any act required of an insurer by law, provided the Supreme Court has not determined by specific rule or opinion that the activity constitutes the unlicensed or unauthorized practice of law

I think that the exemptions as set forth above are sufficiently broad, and should cover virtually all of the kinds of activities in which most licensed agents usually engage in connection with the business of insurance.

Hopefully the new Supreme Court rule will lay to rest an issue which I always thought was a red herring. Agents should not be afraid to review insurance specifications set forth in a contract and make determinations as to whether or not coverages are provided under the applicable policy. To me, this is the basic task for a licensed intermediary who is charged with the responsibility to advise others about insurance needs and coverages. The “practice of law” argument simply does not hold water any more.

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