Insurance Consultant vs Insurance Broker

An insurance consultant is usually paid a fee to advise you and does not place your coverage. A broker places coverage and services it, and is usually paid by insurer commission, client fees or both. If you want independent advice on a program before you shop it, a consultant can fit. If you want someone to place, service and help with claims and certificates all year, you need a broker. Some acquirers use a consultant for design and a broker for execution. This guide is for new owners deciding who to hire after closing.

What does each one actually do?

Both can read a policy and tell you what it says. What differs is the job after that. A consultant's product is advice: a review, a program design, an opinion on a proposal. A broker's product is placement and service: getting quotes, negotiating terms, arranging coverage with an insurer and then supporting you through the year.

The line is not always crisp. A broker can charge a fee and give advice, and some firms offer both services. In New York's statute, a broker is anyone who, for any compensation, acts or aids in soliciting, negotiating or selling insurance or placing risks on behalf of an insured. Being paid a fee does not by itself mean a person is not a broker. Ask any firm exactly what it does and does not do.

How is each paid, and does it change the advice?

Compensation shapes incentives, and every model has them. For many brokers a principal source of pay is commission from the insurer, generally a percentage of premium, and some also charge fees directly to clients. The mix varies by firm and account. The Small Business Administration (SBA) guide to business insurance notes that agents receive commissions from insurers when they sell policies. Insurers may also pay extra based on the volume of business placed (incentive commissions) or on underwriting results (contingent or profit-sharing commissions). The International Risk Management Institute (IRMI), an industry reference, says contingent commissions are not considered illegal or, given proper disclosure, unethical, but calls them somewhat controversial because they may conflict with representing the buyer.

A fee-based consultant has no insurer commission riding on which policy you buy. That can make the advice feel cleaner. It is not automatically cleaner: a consultant paid by the hour may benefit from a longer project, and a consultant who receives referral fees from brokers has a conflict worth asking about.

Disclosure rules vary by state. New York, for example, requires a producer to describe its role and whether an insurer or other third party may pay it based on the sale, with exceptions such as renewals and producers with no direct sales contact, and to give more detail on request. Other states may require more or less. Whoever you hire, ask these questions in writing:

• Are you paid by me, by an insurer, by a broker, or by more than one of these?
• Do you receive any referral fee, commission or other benefit tied to what I buy or whom I hire?
• Do you or a family member own any part of an insurer or a brokerage?
• What is the scope of your work, and what happens after you deliver it?
• Do you carry professional liability (errors and omissions) insurance, and will you put the scope, deliverables and fee in writing before you start?

For the broker side, see how insurance brokers get paid.

Does a consultant need a license?

It depends on the state. Some states license insurance consultants separately, as New York does. In others there is no consultant license, and a person giving fee-based advice may need an ordinary producer license instead.

New York is an example. Its Insurance Law bars anyone from presenting themselves as an insurance advisor or consultant, or taking a fee for reviewing a policy and recommending coverage, unless licensed as an agent, broker or consultant. Attorneys are exempt, and so are actuaries and certified public accountants (CPAs) advising within their profession if neither they nor their employers receive compensation from resulting insurance.

A model law from the National Association of Insurance Commissioners (NAIC) excuses a licensed agent or broker who is hired only for a fee, under a written agreement, to give advice and takes no part in placement, from its rules on dealing with nonadmitted (surplus lines) insurers. That is model text, and each state decides for itself.

Whatever your state, ask the person what license they hold, look it up on your state insurance department's tool, and ask whether they also hold a producer license or take commissions on any placement. Do not assume that someone offering to review your policies is licensed to do so for a fee. This guide checked New York's rules only. No national rule was found, so ask about your own state.

When is a consultant worth paying for after I buy?

A consultant fits when you want a second view with no placement role. These are common moments:

• Before you close, to read the seller's policies and loss runs and tell you where the program is thin. A review from your own broker (see what is a business insurance review) can also help here.
• When designing a program for a roll-up, with shared limits, deductibles or a possible group program. See insurance for holding companies and roll-ups.
• When running a broker selection, so a neutral party helps write criteria and compare proposals. See how to run a broker selection process.
• When a high-stakes decision needs an independent opinion, such as whether to buy tail coverage (extra time to report claims after a claims-made policy ends), how to handle a large deductible or self-insured retention (the amount you pay before the insurer does), or a program built for several companies. For a coverage dispute, ask your attorney.

A consultant is less useful for the daily work of certificates, mid-term changes and claims reporting. Those jobs belong to a broker. For smaller deals, the cost of a separate consultant may not be justified, and a broker review, or a do-it-yourself pass, may be enough. See doing the review yourself vs using a broker.

When do you use both?

Some buyers use both, at different stages. A simple division of labor:

A hypothetical example. A holding company with three add-ons pays a consultant (licensed where the state requires it) a fixed fee to review the combined program and write a short design brief. The brief lists the entities to name on each policy, the limits to test and the questions to ask about each line. The company then gives the brief to a broker, which places the program and services it. The consultant does not take part in the placement and receives nothing from any insurer or broker.

The owners keep the consultant's report as their own benchmark. At the first renewal, they ask the consultant to read the broker's proposal against the brief. The cost is a fee they would not pay with only a broker, and the benefit can be a view of the program that is not tied to what any insurer pays, though the consultant's own incentives still apply.

Is Morrow a consultant or a broker?

Morrow is a licensed insurance agency, a broker, not a fee-only consultant. It can review the policies you inherited, flag gaps and request quotes. Because it also places coverage, its review is part of its brokerage work. Ask Morrow, as you should ask any broker, how it is paid. Morrow is licensed in Arizona, California, Colorado, Florida, Georgia, Illinois, Louisiana, Massachusetts, Michigan, Nevada, New Jersey, New York, North Carolina, Ohio, Pennsylvania, South Carolina, Texas and Virginia. Any new terms depend on carrier underwriting.

If you want advice from someone with no role in the placement, a fee-based consultant may fit better. Check the person's license and independence, and get the scope in writing. For legal, tax or financial questions about the deal, look to your attorney and accountant. If you want a second set of eyes before choosing, send the declarations pages and loss runs you inherited.

Keep reading

• How Insurance Brokers Get Paid: Commissions, Fees and Disclosure
• How to Run an Insurance Broker Selection Process After an Acquisition
• Do-It-Yourself, Broker or Second Opinion: Who Should Review Your Insurance?
• What Happens in a Business Insurance Review, Step by Step
• What Is a Business Insurance Review and When Do You Need One?
• All guides for new business owners

Frequently asked questions

Is an insurance consultant the same as an insurance broker?

No. A consultant is usually paid a fee for advice and does not place coverage. A broker places and services coverage and may be paid by commission, fees or both. Some firms offer both services, so ask what a specific firm does.

Is a fee-based consultant more independent than a broker?

Often, in one respect: no insurer commission depends on what you buy. Consultants still have their own incentives, such as billable hours or referral arrangements. Ask who pays them and whether any money comes from insurers or brokers.

Do insurance consultants need a license?

It depends on the state. New York licenses insurance consultants and restricts who can charge a fee for reviewing policies. Some states have no consultant license, and a producer license may apply instead. This guide checked New York only, so ask the person what they hold in your state and check the state insurance department lookup.

Do I need both a consultant and a broker after buying a business?

Not always. A broker alone is enough for many buyers. A consultant can add value for larger or more complex programs, high-stakes decisions or a roll-up design. If you hire both, put the roles in writing.

Can a broker give me independent advice?

A broker can give useful advice, and a good one explains what it is paid on each placement. Its compensation can vary by insurer, so ask for disclosure and for what it would earn on alternatives. Rules on required disclosure vary by state.

My broker offered a free review. Is that the same as hiring a consultant?

Not quite. A broker's review is part of selling and servicing coverage, so it may point toward a placement. It can still be useful. A consultant's fee buys advice with no placement attached. Ask either one how it is paid and what happens after the review.

References

• New York Insurance Law section 2102, Acting without a license
• New York Insurance Law section 2107, Insurance consultants
• New York Insurance Law section 2101, Definitions
• NAIC: Nonadmitted Insurance Model Act, Model #870 (Section 4E)
• Cornell LII: 11 NYCRR 30.3 and 30.4, Compensation disclosure and exceptions (New York)
• IRMI: Contingent commission (definition)
• SBA: Get business insurance
• NAIC: Insurance Producer Licensing

This article is general information, not legal, tax or financial advice, and not a coverage determination. Coverage depends on the actual policy wording, carrier underwriting, your purchase agreement and your contracts. Ask your attorney and accountant about deal and legal questions.